I realize it’s getting late to discuss the June 12–13 FOMC meeting, but I think the Fed’s biggest news from that meeting may have slipped under the radar. To confirm the relevance of what I thought I heard during the post-meeting press conference, I spent some time last week reviewing old speeches, transcripts and other materials produced by Fed officials. I’m now convinced that Chairman Jerome Powell delivered an important message that went largely unreported, and I expect him to keep at it until people take notice.
Powell’s message is that he intends to pop bubbles—both asset-price and credit bubbles. He didn’t communicate a precise threshold for bubble popping, but I believe he meant not just big bubbles but potentially little bubbles and possibly even pre-bubbles if that becomes necessary to contain the risks of financial instability. If we take him at his word, we should expect him to respond much more aggressively than his predecessors did to financial excesses, and those aggressive responses will occur even without an inflation threat. In other words, policy adjustments designed to maintain financial stability could disconnect from the FOMC’s inflation target.
One of These Fed Chiefs Is Not Like the Others
Before I present my case, let’s recap the status quo that Powell appears to have toppled—namely, the hands-off approach of his three most immediate predecessors:
Alan Greenspan famously wanted no part in popping bubbles, which he didn’t believe should have any effect on monetary policy. He argued that the better approach is to wait for bubbles to pop naturally and then do whatever it takes to clean up the mess. Meanwhile, he relied on the Fed’s regulatory and bank supervisory personnel to maintain a degree of financial stability, although even in those areas he didn’t believe the Fed had much of a role to play.
Like Greenspan, Ben Bernanke insisted that monetary policymakers shouldn’t be expected to pop bubbles. In fact, he argued that the Global Financial Crisis wasn’t the FOMC’s fault largely because there was little it could do to contain bubbles, and it wouldn’t have made much sense to change the bubble philosophy while at the same time denying there was anything wrong with it. So for monetary policy, he focused on cleaning up the post-crisis mess, and then he formalized the inflation target that Greenspan had already introduced informally. He continued to rely on regulation and supervision to achieve financial stability. After the crisis, the chattering classes began to call those efforts macroprudential policies.
Janet Yellen became the third pea in the Greenspan–Bernanke–Yellen pod. She, too, stressed macroprudential policies as the primary “tool” for achieving financial stability. She once delivered a speech titled “Monetary Policy and Financial Stability,” but she used the speech mostly to explain why responding to financial excesses through monetary policy can be a bad idea. In an earlier speech, she expressed hope that such policy interventions would be “exceedingly rare.” And in four years of post-meeting press conferences, she only once discussed a monetary policy response to financial excesses, and that was part of a vague answer to a question she ignored until it was asked a second time. In my humble opinion, she was never fully comfortable discussing financial excesses in the context of the FOMC’s monetary policy decisions.
