Some commentators might even have felt some sympathy for Fed Chief Powell in his first testimony before Congress. He is so obviously navigating a treacherous monetary path ahead without any reliable compass. That is no different from the reality of his predecessor’s position, but at least in Mr. Powell’s case, there is not the academic triumphalism; rather the big danger evident is institutional complacency. 

Yet on second thought, why sympathy? That doesn’t seem the right reaction to Washington power politics and a road to the top job which demanded “an excellent relationship with Treasury Secretary Mnuchin.”

Powell’s Optimism

The market-moving comment in Tuesday’s testimony (February 27) to the House Financial Services Committee came in the question-and-answer session: Chief Powell hinted that the “dot plots” to be published next month might well shift to include four tiny rate rises (including March) by year-end rather than three. The US dollar jumped, stock and gold prices fell accordingly. The basis of the Chief’s view seems to be optimism that strong growth will continue as boosted by the Trump/Republican tax cuts. Ex-chief Yellen, of course, never credited the tax cuts with such positive effect. And this growth cycle upturn is the culmination (from Mr. Powell and his predecessor’s viewpoint) of their successful and innovative monetary piloting of recent years. 

Several of the Representatives’ questions were about the dangers of pre-emptive action to stop inflation rising above target at the cost of halting a nascent acceleration of wage-rates. Chief Powell could have retorted that inflationary monetary policy is not good for wage-earners, even though they may make temporary gains when the economy is red-hot. But even that is dubious in real terms. The reason for historically low gains (if any) in real wage rates over the past decade and more, has to do with real factors and monetary mistakes, not the pursuance of sound monetary policy. In fact, policy has been unsound! Real factors include slow productivity, as the Chief mentioned. Also, there has been the increase in monopoly power across the economy — and not acknowledged by the Chief is the argument that the Fed’s monetary experimentation has held back investment spending, the key driver of productivity growth.