The three factors that make the Federal Reserve change pace
4' min read
4' min read
Jerome Powell's recent statements in Jackson Hole have ignited debate on the direction of US monetary policy. Some observers, especially in the press, have read in the Federal Reserve chairman's words a surrender to the political pressures of Donald Trump, who has long been critical of the central bank's restrictive line. But this interpretation appears reductive.
In summary, we see it this way: Powell may have waited a little too long and perhaps Trump has a point. If he had also considered the rent variable, he should have lowered rates long ago. But the FOMC is inspired by the Phillips curve in making decisions and until negative signals came from the labour market it saw no reason to move.
To understand our argument, it is necessary to recall the theoretical framework that guides the FOMC. For decades, the Fed's strategy has been based on two assumptions: 1. in the short run, there is a causal relationship between inflation expectations and economic growth, hence with the level of employment; 2. the central bank can influence these expectations by manoeuvring short-term interest rates through open market operations and announcements.
These assumptions are not necessarily always correct - indeed, in many instances they have been falsified and the writer is not convinced they apply strongly to the US economy during the past decades - nevertheless they constitute the theoretical pillars from which Fomc reasons.
In the light of. this fact, Powell's choice does not appear to be a political concession, but an orthodox application of the model: reduce rates to support employment and demand without compromising price stability.
