What is Jerome Powell Really Afraid Of?

Jerome Powell has been testifying in front of Congress for the last two days. You have no doubt heard snippets of his testimony on the evening news or in the financial media. Of note, if Trump calls him to fire him, he will say “no, … the law clearly gives me a four year term and four year term and I fully intend to serve”.

However, when Powell is done playing tough guy and testifies about his view of the economy, it is in fact clear that his views have evolved and he is succumbing to Presidential harassment.

Powell is a student of the economy and he believed when he came to be Federal Reserve Chairman that a neutral Fed Funds rate would be just under 3%. In fact, this time last year, he insisted that his intention was to bring the short term Fed Funds rate temporarily just above 3%. Powell reasoned that with a neutral rate at that level, the Fed would have the bullets to shoot in order to fight the next economic slowdown.

The economic slowdown never came, yet the Fed never got above a near term target between 2.25% to 2.50%. Rather, the President and his allies (Larry Ludlow, etc.) began calling for an immediate cut of as much as one full percentage point. CNBC and Bloomberg became full of pundits (know-nothings) explaining that the Fed had overshot. Even the NY Times editorial board today called for the Fed to cut rates.

Powell is too smart to really believe that we should be cutting rates. But, he is afraid of confrontation, especially with the President. (I, incidentally, believe that the President may have the legal right to fire the Fed Chairman). He, therefore, is testifying about how he is afraid of every economic risk imaginable in order to lay the foundation for cutting rates.

The economic risks that Powell cites are (excluding Brexit) general and always present risks to the economy. They were just as present a year ago when Powell wanted to normalize the Fed funds rate higher than where it is today. Powell knows that.

And so, he is going to sit by and let’s the Republicans try to juice the economy into some sort of unsustainable 3% growth rate over the next year. He has decided that casinos can be fun (perhaps even Trump casinos).

However, by lowering rates right now, Powell just may make the US the new Japan of the last 30 years or Europe of the last decade. We have not had a normalized neutral Fed Funds rate since the 2008 financial crisis; failure to get there and the loss of independence of the Fed are likely to have real consequences down the road.