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**AUGUST 26, 2022**
Kuttner on TAP
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**** Powell Sides With the Inflation Hawks
Reverting to type, the Fed chair ignores supply factors.
At his speech this morning
at the Fed's annual Jackson Hole conference, Fed Chair Jay Powell did
not disappoint those calling for a Fed-administered recession. Powell
declared that "reducing inflation is likely to require a sustained
period of below-trend growth," a polite euphemism for recession.
Powell indicated that the Fed would keep raising short-term interest
rates at the September meeting of its policy-setting Federal Open Market
Committee, leaving open whether the hike would be another three-quarters
of a point, of perhaps a lower half-point increase. "Our decision at the
September meeting will depend on the totality of the incoming data and
the evolving outlook."
But just to douse any optimism that the Fed might relent, Powell added,
"Restoring price stability will likely require maintaining a restrictive
policy stance for some time. The historical record cautions strongly
against prematurely loosening policy."
Just to add insult to injury, the Fed chair scapegoated workers. "The
labor market is particularly strong, but it is clearly out of balance,
with demand for workers substantially exceeding the supply of available
workers." In fact, long-overdue wage increases are lagging inflation,
not driving it.
Powell also invoked the stagflation of the late 1970s, with a positive
shout-out to then-Fed Chair Paul Volcker's disastrous policy of
raising short-term rates to over 20 percent and deliberately creating a
deep recession rather than addressing structural factors. "A lengthy
period of very restrictive monetary policy was ultimately needed to stem
the high inflation," Powell said, praising Volcker as a role model.
The Fed chairman's speech said not a word about supply chain
bottlenecks, nor about price-gouging by suppliers with monopoly power,
nor the impact of the Russian invasion of Ukraine. It was about what
you'd expect of a Republican central banker who came from Wall Street,
only worse.
Biden should regret having passed over Democrat Lael Brainard in favor
of reappointing Powell, a Trump appointee who feigned dovishness during
his Biden audition period. To the extent that so much of today's
inflation is the result of supply bottlenecks, pushing the economy into
recession will not cause more ships to unload or more oil and wheat to
appear on world markets.
As Powell admitted, "While higher interest rates, slower growth, and
softer labor market conditions will bring down inflation, they will also
bring some pain to households and businesses." He got that right.
~ ROBERT KUTTNER
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ALTERMAN
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