As someone who studied history and lived through the late 1970s in high school then into college, it might seem like I am now once again sound like the old man screaming at clouds type of warning. This is only because every type of monetary and economic theoretical mistake of that decade seems to be the path that both the President of the United States and the Federal Reserve seem damned to repeat.
Instead of beating the dead horse of the All the President’s Men again, it is time to focus on the nightmare in the Eccles Building as Jay Powell appears dead set on attempting to repeat the mistakes of Paul Volcker but instead may just start a repeat of the Arthur Burns stagflationary era.
A Repeat but This Time It’s Different?
In 1971, the US economy was still floundering with unemployment still growing after the recession of 1969 was pretty much over. President Nixon had his man at the Federal Reserve, Arthur Burns, but was insisting on lower rates and an expansion of the money supply to prevent a recession from impacting the 1972 elections.
From the Journal of Economic Perspectives, Fall edition 2006, How Richard Nixon Pressured Arthur Burns: Evidence from the Nixon Tapes by Burton A. Abrams, via the FRED database, Federal Reserve Bank of St. Louis Documents:
Evidence from the Nixon tapes, recently made available to researchers, clearly reveals that President Nixon pressured Burns, both directly and indirectly through Office of Management and Budget Director George Schultz, to engage in expansionary monetary policies prior to the 1972 election. The relevant taped conversations used in this study usually involved only two or three persons. While Nixon knew of the tapings, his remarks are remarkably forthright, as though he had forgotten that the tapes were running.
Much like the current administration, there was no shyness about admitting the President wanted and would continue to pressure the Chairman of the Federal Reserve for lower rates. In fact, it accelerated to the point where on December 10, 1971, Arthur Burns relented and persuaded the other FOMC members to cut rates. This was followed up by another phone call to President Nixon which went as one might expect (from the same article above):
With fewer than eleven months until the election and four days until the next meeting of the Federal Open Market Committee, Burns and Nixon have a private telephone conversation. Burns states that “I wanted you to know that we lowered the discount rate. .. got it down to 4.5 percent.” “Good, good, good,” replies Nixon. Burns indicates that the announcement of the discount rate reduction would be accompanied by the usual statement that it was done in order to bring the rate into line with market conditions, but with an added statement that it was done to “also further economic expansion.”
Burns exclaims that he also lowered the rate to “put them [the Federal Open Market Committee] on notice that through this action that I want more aggressive steps taken by that committee on next Tuesday.” “Great. Great,” replies Nixon. ‘You can lead ’em. You can lead ‘em. You always have, now. Just kick ‘em in the rump a little.”
I’ve added the emphasis because it certainly seems to be entering into an almost identical if not similar situation with Trump’s pressure on Jay Powell. But is this the path Chairman Powell will take and if so, why?
The Jackson Hole Statement or Surrender?
If one takes the time to parse the statement, even after watching it again today as this author has, one has to ask if this was a blatant or deliberate mistake to create one more surge in asset prices to compensate for economic weakness below the surface.
The housing market is starting to implode rapidly with affordability now a modern joke, wages stagnating to the point where the average age of home buyers was 56 per the National Association of Realtors, while the median age of first time home buyers has risen to 38 years old.
Meanwhile, inflation has begun another resurgence, some say due to the tariffs, while others point out quite accurately, the rate cuts initiated last September by the Fed are just now starting to filter into the economy and pushing the money supply back into expansion mode. With sticky consumer price inflation ex-food and energy now firmly above 3.1%, this leaves the Federal Reserve running out of options rapidly.
Eerily, much like Volcker’s actions in 1980 , Chairman Powell’s speech in Jackson Hole seems almost oblivious to the reality of the inflationary pressures on US consumers. This excerpt speaks volumes about the perception from America’s central bank:
Measures of longer-term inflation expectations, however, as reflected in market- and survey-based measures, appear to remain well anchored and consistent with our longer-run inflation objective of 2 percent.
Measures of longer-term inflation based on flawed data collection models? The Fed’s own models depend on data from the Bureau of Labor Statistics and the President is on the warpath to fix both the employment and inflation data to reflect his version of economic reality. The data collection methodology has become so flawed that imputation, aka, an educated guess, is used to estimate CPI data on almost 30% of all items listed.
This is no way to run a railroad, and Chairman Powell’s speech had some other gems which were shocking to say the least.
With inflation above target, our policy rate is restrictive—modestly so, in my view. We cannot say for certain where rates will settle out over the longer run, but their neutral level may now be higher than during the 2010s, reflecting changes in productivity, demographics, fiscal policy, and other factors that affect the balance between saving and investment.
Restrictive? Has this man looked at asset prices of absolute nonsense lately?
My reader’s eyes are not deceiving them. That’s a $4.5 billion plus valuation based on an internet frog meme, a $1.7 billion memecoin named after the President which is being exploited (allegedly) by members of his family for personal profiteering, and a $942 million on yes, America’s greatest memecoin innovation, Fartcoin.
Sad to say ladies and gentlemen, Jay Powell and the entire Federal Reserve are more out of touch with reality than Ben Bernanke and his team was in 2006. All one has to do is look at some of the absurd IPOs hitting the market to understand this fact.
Where the Markets and Fed Funds Rates Move From Here
This author warned everyone in February of 2024 that there was a high risk that the Federal Reserve would make another policy blunder when I highlighted Powell’s desire to be remembered as a modern day Paul Volcker.
The theory that the Fed does not cut rates excessively moving into the final months of a Presidential election cycle first became an obvious misnomer when Federal Reserve President Paul Volcker cut rates prematurely in May and June of 1980 by over 10% as his Fed speculated the stagflationary recession was ending and inflation contained.
Volcker’s Folly, as some economists called it, was to prematurely believe that despite persistent background inflation, the spikes or raging inflation of the past six years was over. As history and the chart indicates, he was incorrect and despite a relatively easy money policy compared to 1979, the incumbent lost the 1980 election.
Will Jay Powell repeat the same mistake that Paul Volcker did in 1980, misreading the inflationary impulse in the economy and unleashing one final spike of monetary expansion moving PCE and core inflation, much, much higher which creates a stagflationary scenario?
The Jackson Hole speech seems to indicate that the employment mandate has taken primacy over inflation:
First, we removed language indicating that the ELB was a defining feature of the economic landscape. Instead, we noted that our “monetary policy strategy is designed to promote maximum employment and stable prices across a broad range of economic conditions.” The difficulty of operating near the ELB remains a potential concern, but it is not our primary focus. The revised statement reiterates that the Committee is prepared to use its full range of tools to achieve its maximum-employment and price-stability goals, particularly if the federal funds rate is constrained by the ELB.
Second, we returned to a framework of flexible inflation targeting and eliminated the “makeup” strategy. As it turned out, the idea of an intentional, moderate inflation overshoot had proved irrelevant.
There is limited precedent for cutting rates when inflation, especially Sticky CPI (ex-food/energy) is over 3% as the chart below indicates.
Generally this course of action is usually only engaged in as the recession was nearing an end and the inflationary threat was substantially subsiding. In the modern era since the GFC, there has never been a rate cut when so-called Supercore inflation was above 3% so such an action as interpreted by markets and hinted at by Powell would be unheard of.
Especially based on his statement above and considering that all economic data will be even more suspect that it has been, as these pages have been documenting since 2007.
Powell’s Folly or a Stagflation for the Modern Era?
If Federal Reserve Chairman Jay Powell only entertains a 25 basis point cut in the Fed Funds rate at the September FOMC reading with a moderate nonfarm payrolls report and persistently higher core inflation, then the political pressure being ratcheted up on his office will only accelerate as it has in the past week.
If “Too Late” is called out as “too little, too late” by the President, speculation will only increase that President Trump will demote Powell from his Chairmanship, and replace him with a moderate Fed Governor in the interim with the hopes of pushing for an emergency cut or a jumbo cut of 50 basis points or more at the October meeting.
Unfortunately for all parties involved, the news and more permanent tariff impacts will be measurable by that FOMC meeting, providing a more direct impact on the inflation data at least for the intermediate term along with some degree of hostility from other Fed members if Powell is replaced.
Regardless of the outcome, an acceleration of the stagflation America has been enduring is almost a guarantee and by using the Fed as his foil, the President will once again ignite the populist fervor until the masses universally agree once again it was the fault of those “wealthy bankers” instead of the combined inept policies of all of the guilty parties involved.
