Why Is The Federal Reserve Chairman Talking About Accelerating Inflation?

Isn’t inflation bad?

Nobody wants to pay more for stuff, right? Yet getting inflation running at a little higher rate than it is right now is the main theme Fed Chair Jerome Powell keeps returning to during a day before the House Financial Services Committee. Yet Powell’s motif seemed to get lost in a lot of the coverage of his testimony, because most news organizations that bothered to cover it at all instead tried to cull things that might provoke another Twitter tirade from Trump now that Powell’s become one of the President’s most notorious nemeses.

So let’s get that stuff out of the way first:

• Powell does seem to be calling for the Fed to cut interest rates, and that cut will probably come as early as this month. This would be the first time in years the Fed has cut rates, going back to the last Recession, when it greatly needed to stimulate the economy to revive it, which is not really the case now. This would be more giving the economy a pacemaker than reviving it after major cardiac arrest.

Trump’s been loudly advocating rate cuts for a while, and arguing “his” economy would be booming even more if the Fed hadn’t held back. So now that the Fed seems to be steering into Trump’s lane, does that mean he was right? Yes it does. But it also means Fed Chair Powell was right too: the economy’s still showing moderate, steady growth, and the stock market is at or near record highs. It’s part of his job to avoid excesses of the type the President seems to favor. And also some of the reasons for the global economic slowdown that’s causing the Fed to reassess what it can and should do can be traced back to actions by Trump. For instance, his trade war with China.

Of course, Wall Street’s already getting greedy, and postulating the Fed will have to cut even more, because the economy and stock prices have already factored in a first round of cuts.

• When Powell is asked point blank by Committee Chair Maxine Waters (Trump calls her a “low I.Q. person”) if he’d leave if Trump tried to fire him, Powell, in a somewhat humorous exchange, makes it clear his answer would be “no”. Here’s that clip (click on the photo to watch):

Fed Chair is one of those weird positions that while appointed by the President, is allowed to and expected to operate somewhat independently, (even more so than the Attorney General, for instance). The Fed Chair is not a cabinet member. At the same time, the President can theoretically fire a Fed Chair, for cause, at any point during their 4-year term (most have tended to be kept on much longer, and many have overlapped Presidents of different parties, due to the unique nature of the job, and the importance of having a steady, predictable hand at the top of the U.S. central bank). And even if Powell said no, would Trump attempting to do so be anything more than yet another of the President’s Constitutional crises, a question of the limits of executive power, to be decided by the Supreme Court? There’s some reason to believe in this case it might. That’s because a rash move by Trump would create havoc in the financial markets, and Trump knows this. That’s why he’s been blowing his bugle and kicking up dust but not charging. Of course, if Trump’s reelected, and Powell’s term comes up during his second term, all bets are off (or actually, we would bet you right now he’s out). It’s also interesting to note in this context, that Chairman Powell is a lawyer by training, and does not have an advanced economics degree.

• Powell also subtly (and sometimes not so subtly) also suggests the U.S. economy might not be as strong as perhaps the President would want you to believe. Saying at one point:

“We don’t have any basis…for calling this a hot labor market….To call something hot you need to see some heat.”

Instead, he characterizing it, simply, as “good”. Pointing out that despite low unemployment, wages are not rising nearly as fast as they have in past times of strong economic growth.

Here’s that clip (click on the photo to watch):

• So now let’s finally get back to where we started: inflation. Which we tend to think of as bad, because a lot of the time it is. Runaway inflation is one of the most dangerous things an economy can encounter, and can take the longest amount of time to fix, and the highest toll on consumers.

At the same time, capitalism doesn’t really work if there isn’t some inflation (the only reason it might, sometimes, is if you have periods of extreme increases in productivity). In order for an economy to grow, there has to be increasing demand for products and services. If there is demand, the prices of those products and services will go up. As a result, corporations make more money and employees can demand and get raises.

Right now inflation in the U.S. is less than 2%. That’s considered a little dangerous, because if there is a quicker or bigger than expected slowdown in even one major area of the economy, it could quickly turn into deflation, which means the price of stuff goes down, sucking the nation’s economy down with it. It’s a deep hole where jobs and wages shrink, and can take decades to get out of. Powell uses the examples of Japan and what’s happening now in Europe to illustrate his point in this clip (click on the photo to watch):

So what does the Fed do to fan the flames on inflation a bit? Lower interest rates. How does that work? It literally makes dollars cheaper. So it means dollars should be easier for people to get. And that means the prices of goods and services will go up faster, because people will be willing and able to pay more for them.

At the same time, the Fed is still taking a little bit of a risk. Because if it cuts rates now and there is a sudden, significant, unexpected slowdown, that takes away the effectiveness of one of its best weapons to battle a slowdown, which is to cut rates.

• Ending on a personal note: we’ve spent several decades now covering financial news. And yes, testimony by the Federal Reserve Chair is almost always confounding and cryptic, and often just plain boring. Fed Chief Powell is not as big a mold-breaker as President Trump by any means, but at the same time Powell is not as dry as most, and not without humor. He’s plain-spoken, and more transparent in his speech, and forthcoming in his responses than any Fed Chair we can remember. Which is particularly important (for reasons that should be obvious by now) during this Presidency. Thank God Trump nominated Jerome Powell to the job.