As he does eight times a year, Jerome Powell will stroll in front of a podium on Wednesday afternoon and discuss the latest decision of the FOMC and answer softball questions from reporters. This is always an interesting event, but I daresay that the press conference this week will easily rank in the top five of the past decade in terms of importance and consequence.
I’m going to set aside my usually bellyaching about whether the Fed should even exist or not. Let’s allow the proposition that, in this modern world, a central bank is necessary, and that they are indeed tasked with their oft-repeated dual mandate of maximum employment and low inflation. Given that dual mandate, almost all of the past 30 years have been exceptionally easy for the Fed, since employment tended to be strong and inflation tended to be quite low.
We now find ourselves in an extremely interesting situation, which is unique even when you include the financial crisis. Powell, and the Fed in general, find themselves face a real life trolley dilemma.
Powell doesn’t have just one beast to deal with right now (specifically, inflation). He has a second beast, the banking crisis, which requires precisely the opposite “tools” to combat as the first one.
As has been made abundantly clear by recent data, Powell has already, it seems made the decision, which is to support his banking buddies. Even the most cursory glance at the data, which the Fed itself provides, shows that hundreds of billions of dollars have been hurled specifically at the banking sector (which, unlike, let’s say, the sporting goods sector or the textiles sector doesn’t enjoy the infinite and immediate assistance of the Federal Reserve any day, any time, and for any amount). This firehose of liquidity cannot be sequestered from the economy in general. If he wants to help out his banking buddies, he’s going to screw up his efforts to combat inflation in the first place.
Now I realize that the questions posed to Powell at these things usually aren’t much more challenging than “Are you going to try your darnedest to do a good job?” and “Do you tend to prefer dark or milk chocolate?” but if there is any reporter there worth his or her salt, it would be awfully nice if they would demand Powell to reconcile his ostensible (and legal) obligation to get inflation back down to 2% with the fact that he has turned on the infinite money fire hose (which recipients of such funds are mandated to be kept secret for TWO YEARS!).
It’s going to be fascinating to watch, and I expect some squirming is bound to take place. It’ll be even more interested to see what the reaction is from the market, because I suspect Powell is going to tacitly acknowledge that the public is going to have to rely on thoughts ‘n’ prayers for inflation to go down, since Powell has his banking friends to think of first.
