Jerome Powell’s plan for a “soft landing” is to speak loudly and carry a small stick
Speaking Loudly:
“The U.S. economy is in a strong position and well-positioned to deal with higher interest rates.”
This is obviously a questionable statement. It’s one of many JPOW quotes arguing that a soft landing is possible. He claims consumer spending is unwavering, job growth is robust, unemployment will only rise to 4.1%, etc.
So why is JPOW furiously arguing a losing position?
The Small Stick:
“Much of it is really not down to monetary policy”
JPOW concedes, there are many factors that are out of the feds control. The Ukraine war, commodity prices, and supply issues are external factors that are unaffected by monetary policy.
Monetary policy alone will not lead to a soft landing. External factors need to also line up to bring inflation to the feds goal of 2%. In the end, JPOW has a small stick that cannot do enough to curb inflation.
He can’t always make pie in the sky statements about how everything will work out. Acknowledging the precarious situation ultimately gives people more confidence in him.
The Michigan Survey
This survey measures households expectations for inflation. Shortly after CPI numbers, the Michigan Survey showed consumers expected 5.4% annual inflation. This reflects a rise in lack of faith in the feds ability to to curb inflation.
JPOW cited the survey as “quite eye catching” and “something we need to take seriously.” He went on to say these elevated inflation expectations were a factor in deciding a to hike rates more than he originally guided for.
So why is JPOW holding so much weight on inflation expectations?
Speaking Loudly = Public Confidence
Currently the public, according to JPOW, believes the fed has the ability to bring inflation down to 2%. (He said this during his latest press conference).
The Michigan survey showed that this public confidence in the fed is faltering. Households expecting high inflation is a sign people don’t believe in the fed.
He states, regarding public confidence in the feds ability, ”It's absolutely key to the whole thing that we sustain that confidence.”
Inflation expectations hold so much weight because:
Public confidence that a recession will not happen is key to preventing a recession. It is not a soft landing if fighting inflation induces a recession. Public sentiment shifting towards recession expectations could be the tipping point that would prevent JPOW’s soft landing.
Sentiment is why he argues tirelessly that the consumer is strong and the economy can withstand rate hikes. He took more aggressive action against inflation to improve sentiment. He wants to show that the fed has the tools to guide us to a soft landing even if it doesn’t.
Markets are forward looking. It is not without merit that belief in a recession is a self fulfilling prophecy. Panic causes financial collapse more than anything else.
This is also the reason why Treasury Secretary Janet Yellen said she does not believe a recession will occur.
Admitting defeat is what leads to defeat. As long as you don’t accept it you can keep fighting.
I think this shows how little the feds actual power is. They’re speaking loudly and carrying a small stick.
TLDR: JPOW aims to cancel the recession by convincing people a recession will not happen.
Leave a Reply