The Fed’s Jerome Powell is owning the inflation problem

Data: Federal Reserve; Chart: Axios Visuals
Data: Federal Reserve; Chart: Axios Visuals

The two most striking moments of Federal Reserve chair Jerome Powell’s news conference Wednesday came at the very beginning and near the end.

He started the session by staring into the camera and telling the American people that inflation is too high and the Fed is determined to bring it down. Later, when asked a question about what other branches of government could do to fight inflation, he demurred, essentially saying inflation is the Fed’s problem to solve.

Why it matters: The Fed may be late in attempting to bring down inflation, but Powell is putting the problem squarely on his own shoulders, leaving no doubt that, for better and worse, the central bank will squeeze the money supply until prices stop rising so fast.

The big picture: For most of 2021, the Fed viewed surging inflation as a temporary problem that would go away on its own. But since December, it has completed a pivot toward tighter money aimed at bringing down demand in the economy to more closely align with constricted supply.

  • They were late, but they’re aiming to make up for that by moving fast. In Wednesday’s news conference, Powell all but pre-announced that this week’s half-percentage point rate hike — the first in two decades — will be followed by at least two more.

Between the lines: Powell’s initial comments were aimed at ordinary Americans, not the economics reporters and bond traders who habitually hang on his every word. “Before I go into the details of today’s meeting, I’d like to take this opportunity to speak directly to the American people,” he said.

  • “Inflation is much too high and we understand the hardship it is causing, and we’re moving expeditiously to bring it back down,” Powell continued. “We have both the tools we need and the resolve it will take to restore price stability.”
  • He was using his bully pulpit to assure people making economic decisions that the Fed will not let high inflation become entrenched. “The Fed Chair’s mission appeared focused on anchoring inflation expectations and dismissing any doubt that the Fed would return inflation to its target,” wrote David Page, of AXA Investment Managers, in a note.

In response to a question about what the Biden administration or Congress might do to contain inflation, Powell didn’t take the bait, such as by pointing out that steel tariffs aren’t helping supply constraints. “It’s really the Fed that has responsibility for price stability,” he said. “We need to stay in our lane and do our jobs.”

  • “When we get inflation back under control, then maybe I can give other people advice,” he quipped.

Flashback: You can contrast that tone with that of Arthur Burns, the Fed chair during the 1970s who presided over a time of rapidly rising inflation. He tended to have a laundry list of reasons high inflation wasn’t the Fed’s fault.

  • In a self-pitying speech in 1979 titled “The Anguish of Central Banking,” he blamed “the persistent inflationary bias that has emerged from the philosophic and political currents that have been transforming economic life” since the 1930s.

The bottom line: The Powell Fed isn’t going to emphasize Burns-like excuses if inflation remains high — which means that the tightening will continue until prices relent, even if that turns out to mean economic pain ahead.

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