Fed Powell is increasingly criticized for incorrect inflation measures

WASHINGTON – Federal Reserve Chairman Jerome Powell was praised for his deft leadership during the catastrophic course of the pandemic recession. However, when threats to the US economy emerged, Powell struck less confident Fed observers.

Inflation turned out to be higher and more persistent than he had previously seen as a Fed economist. And at a political meeting last week, Powell announced at the last minute an unusual move to raise rates more than he had previously signed – followed by a press conference that many economists described as confusing and unfavorable.

This is a sharp change for Powell, who is widely acknowledged in anticipation of what could have been an even worse economic crisis during the pandemic, and who received a quick bilateral Senate confirmation last month for a second term of four years. Now faced with persistently high inflation, declining financial markets and a growing threat of recession, Powell has to deal with questions – and criticism – about his Fed’s stewardship at a time when his problems are growing.

With the centuries-old pandemic, the first decade-long European war, and rising gas and food prices, which the Fed has limited power over, Powell will be the Fed’s first president since Paul Volcker struggled with “…” in the early 1980s. “stagflation”, a pathetic combination of slow economic growth and high inflation.

Powell sought to sustain the worst case of inflation in four decades and raised the Fed’s short-term interest rate three times a quarter last week – the largest single rate increase in the fourth century. It was an unexpectedly aggressive move after Powell announced a month earlier that there would be a slight increase in the middle rate.

At his press conference, Powell defended the Fed’s decision that the latest inflation figure was more worrying than expected. The rise of the Fed will make prices more expensive for many consumers and lending businesses.

Although Powell’s statement was erroneous to many Fed observers, some complained that he failed to formulate a fair and consistent policy.

“The Fed lives off advertising, crawling to achieve even higher inflation,” said Mark Zandi, chief economist at Moody’s Analytics. “The herdsman has no script and does it the way it goes here.”

William Dudley, who as former head of the Federal Reserve in New York served with Powell on the Fed’s Board of Governors, said in a think-tank web coverage last week that the central bank leader was threatening his credibility. .

“If the Fed changes this at the last minute,” Dudley said, “it has the potential to damage the credibility” of vital communication with markets and the public. If criticism sounds harsh, Powell will visit Capitol Hill this week to give his biannual testimony before House and Senate committees, where he may face more complex issues than ever in his chair. One year after reiterating his confidence in Congress, he will show that inflation is only temporary and is likely to “subside”.

It is not. In May, according to the government, consumer prices accelerated by 8.6% compared to last year. Powell told a news conference last week that the Fed was surprised by the latest data, inspired by Russia’s invasion of Ukraine, still-hidden global retail chains, labor shortages and growing demand for services ranging from rental to airline tickets to restaurants. foodstuffs.

“We haven’t seen any progress and we want to see progress, and that’s another part of why we’re doing what we’re doing now,” Powell said on Wednesday.

The Fed’s huge rate hike and Powell’s comments renewed concerns among economists about where he has taken the Fed. Most analysts have sharply criticized the Powell Fed for waiting too long to tighten credit when inflation took off last year and warn that it’s now having to raise rates so fast as to risk tipping the economy into recession.

“Our worst fears around the Fed have been confirmed,” Ethan Harris, global head of economics at Bank of America, said in a client note last week. “They fell way behind the curve and are now playing a dangerous game of catch up.”

A related concern is that Powell has said the Fed will keep raising rates until there is “clear and compelling” evidence that inflation is declining toward its 2% annual target. But rate hikes typically take months to slow the economy. The Fed may end up raising rates more than necessary before admitting that inflation has fallen, increasing the economy’s chances.

“A difficult landing is very likely,” Dudley said. “The risk of a difficult landing increases.”

Last week, Powell expressed some optimism about economic stability, although his confidence was much calmer than in previous months. He also hopes that the Fed will achieve a “soft landing”, which means that growth will be slow enough to curb inflation without reversing the downturn and widespread unemployment.

Dudley suggested that Powell do more to alert the public to the possibility of a real economic catastrophe.

Last week, the Fed’s policymakers updated their economic projections to show, for the first time since they started raising rates in mid-March, that they expect unemployment to rise and the economy to weaken over the next two years. Still, the projected increases were small, with unemployment rising to 3.9% by the end of 2023, just three-tenths of a point above its current level.

Many outside economists are more pessimistic, raising the question of whether the Powell Fed is still underestimating the damage the economy may absorb.

“They’ve gone from terribly unrealistic to marginally plausible in their forecasts,” Dudley said.

Other economists noted what appears to be a central contradiction in Powell’s comments: He said the Fed is raising rates more quickly and likely to a higher level than it had expected just three months ago because gas and food prices, the most visible signs of inflation, keep rising. “But Powell has made it clear that the Fed has no control over the quake,” said Krishna Guha, an economist at Evercore Investment Bank ISI. “The aspects of the press conference … don’t seem to be exactly the same or wise.”

Powell may be relieved that other central banks around the world are also struggling to control inflation. On the same day that the Fed raised its key rates to three-quarters of the point, the Swiss National Bank announced a surprising medium increase, the first increase of any size.15 years ago.

The Bank of England has been criticized for raising its key level by a quarter of a point to five consecutive sessions, a rate some observers find too slow to limit inflation, which could reach 11% this autumn. The Reserve Bank of Australia has increased its benchmark rate twice in the past five weeks, after leaving it at nearly zero for 11 years.

Some economists speculate that in announcing last week’s surprisingly large rate hike, Powell intended to confound expectations by showing increased resolve by the Fed, even to the point of risking a recession if necessary to defeat high recession.

“They are taking a risk of overshooting, but I suspect that it’s a deliberate risk, given the priority they have of getting inflation down,” said Donald Kohn, a former vice chair of the Fed who is now a senior fellow at the Brookings Institution.

At the same time, most Fed watchers acknowledge that Powell’s tenure has been unusually challenging, starting with constant public attacks from former President Donald Trump — who had appointed him Fed chair — and later the pandemic recession and surging inflation exacerbated by Russia’s invasion of Ukraine.

“In the past year, it seems like everything’s gone wrong,” said Douglas Porter, chief economist at BMO Financial Group. “I think we’re actually due for a little bit of good luck. There is still a path for the economy to get through this without a full-on recession.”