The Federal Reserve froze its funds rate on Wednesday as a means of fulfilling its goals of maximum employment and 2 percent inflation. Many Democrats reacted by demanding that the Fed expand its dual mandate into a threefold mandate.
Even before Jerome Powell stood behind the podium in Washington, D.C., Wednesday, Sens. Elizabeth Warren and Bernie Sanders, and Reps Ayanna Pressley, Pramila Jayapal, Rashida Tlaib, and others affixed signatures to a letter falsely claiming the Powell had already achieved the 2 percent inflation goal, so the Federal Reserve chairman needed to “seriously consider the harmful economic consequences of maintaining excessively high interest rates for an unnecessarily long period of time.”
Excessively high? Unnecessarily long? The politicians left their phrases undefined as their message remained perfectly clear: This is an election year, so you better help us win by slashing rates, banker boy!
They did not explicitly outline the third mandate they wished for Powell to pursue. One nevertheless gleaned the impression that elect Democrats trumps maximum employment and price stability as a mission of the Fed in their minds.
Jerome Powell generally cuts a figure more reserved than federal, more banker’s suit than power tie. His manner inspires confidence unless you want him to act the confidence man. In a calm, collected, and measured manner, he explained at Wednesday’s press conference that the Federal Reserve may still cut rates three times this year — and then again it may not.
He noted that 4.6 percent, down from the current 5.25–5.50 percent federal funds rate, comes in as the median rate from his Fed colleagues that they forecast for the end of the year. And the three cuts he sees bringing rates into that neighborhood he admits are “going to depend on the incoming data.”
The data, though, suggests stay the course or even raise rates. The annual consumer price index moving from 3.1 percent in January to 3.2 percent in February signals a red light to the plan of lower rates in 2024. Other, larger stop signs arose on the hard road to easy money. The in-month consumer price index ran .2 percent for December, .3 percent in January, and .4 percent for February. Notice a trendline? It does not travel in a direction that says something rate cuts this way comes.
The first question, from a CNBC reporter, wondered if the Fed now more greatly tolerates inflation given the recalcitrance and even rise in the consumer price index not generating interest rate increases. Less than two years removed from the consumer price index approaching double-digit territory, why the eagerness to pursue the very loose monetary policies that brought the United States inflation rates not seen in more than four decades?
Powell interpreted the overall numbers Wednesday as “inflation moving down gradually on a sometimes bumpy road toward 2 percent.” This same man, after all, repeatedly described inflation as “transitory” after it started its ascent from 1.4 percent in January 2021 toward its 9.1 percent peak in June 2022. His job partly does involve keeping the Ebenezer Scrooge-Daddy Warbucks-Montgomery Burns community optimistic.
So, within this seemingly staid man exists a split personality: Good Jerome and Bad Jerry. The former drives a reliable Volvo; the latter, a 1973 souped-up Coupe Deville with three-wheel motion. They represent the dual personalities representing the hard work of Main Street and the shortcuts of Easy Street. And those addresses, of course, represent the political stresses on the dual mandate that push and pull for responsibility or recklessness.
Good Jerome verbally shifted from the word “transitory” in December 2021 but Bad Jerry did not shift the numbers — then the fed funds rate stood at around zero — of bargain-basement cheap money. Good Jerome finally prevailed in March 2022 with a tepid .25 increase when inflation had already reached 8.5 percent.
Powell’s performance looks stellar, Good Jerome even, from that point until now. The Fed raised rates 11 times and paired down the balance sheet from almost $9 trillion in assets to about $7.5 trillion. And Wednesday’s statement from the Federal Open Market Committee struck the right chords. The key paragraph in the otherwise formulaic statement read:
In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans. The Committee is strongly committed to returning inflation to its 2 percent objective.
But glimpses of Bad Jerry, the guy under gold chains and a purple fedora, emerged in the press conference when he maintained the three-rate-cuts-in-2024 delusion and talked of slowing the pace of the Fed lowering its balance sheet bloated by more than a decade of quantitative easing as its default though mostly unstated policy. One senses that Bad Jerry, jonesing for a fix of the cheap money the Fed habituated so many in his ostensibly staid profession, at some point came to see dollars as something to rain upon financial institutions and the tightening of that sky spigot as abnormal. Tlaib, Jayapal, et al. want Bad Jerry to make it rain as he has done so many times in the past.
Good Jerome, however, surely knows that economic data, not the pleas of politicians up for reelection, dictate his behavior as a central banker.
Americans find out in 2024 whether Donald Trump or Joe Biden sits in the Oval Office in 2025. We also learn if Bad Jerry or Good Jerome, a guy who uses such soporific speech as “nominal wage growth” and “slow the pace of runoff” and not the pimpspeak of his alter ego, wins the battle over whether the Federal Reserve chases after its unstated third mandate.
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