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 policy makers 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.
With that history in mind, we’ll take a close look at the June 13 press conference, which was the second Powell hosted as chairperson. In fifty-two minutes of soft-spoken dialogue with the mainstream media, Powell tossed aside the Greenspan–Bernanke–Yellen playbook five times. As you’ll see, the five instances were somewhat repetitive, but I’ll excerpt each one to show how calculated the new message appears to be. I’ll also highlight the key words, starting with an excerpt from his opening statement:
“We are aware that raising rates too slowly might raise the risk that monetary policy would need to tighten abruptly down the road in response to an unexpectedly sharp increase in inflation or financial excesses, jeopardizing the economic expansion.”
The language in this sentence might seem ordinary if read quickly, but comparisons to what we would have heard from Yellen show it was a clear departure. Consider the following observations from my review of Yellen’s press conferences as FOMC chair, beginning with her first in March 2014 and ending in December 2017:
- When discussing the Fed’s response to an inflation threat, either real or hypothetical, Yellen never included financial excesses as a second possible trigger for policy tightening.
- She never volunteered any discussion at all about financial excesses or potential financial instability without first being prompted by a question about those topics or without her comments being in reference to the Fed’s regulatory and supervisory roles, not the monetary policy role.
- She only once acknowledged the possibility of the FOMC responding to financial excesses, but as noted above, that was part of an answer to a direct question that had to be asked twice. It was also in a “well, I would never rule anything out” kind of way. Here’s the exact excerpt: “[I]f the question is, to what extent is monetary policy, at this time, being driven by financial stability concerns, I would say that—well, I would never take off the table that monetary policy should—could, in some circumstances, respond. I don’t see them shaping monetary policy in an important way right now.”
So Powell’s opening statement wasn’t just boilerplate language. Those three words—or financial excesses—never appeared in the same context in any of Yellen’s sixteen press conferences, let alone in the opening statement.
But that was just the beginning. Here’s the next excerpt, this one in response to a question about wage growth:
“Our role though, is also to, you know, to make sure that that maximum employment happens in a context of price stability and financial stability, which is why we’re gradually raising rates.”
Holy triple mandate, Batman, I count three goals in that sentence. Needless to say, Yellen never defined the Fed’s role in the same way. She never elevated financial stability alongside the traditional goals of full employment and stable prices. And take note, Powell was answering a question about wage growth—there was no prompting whatsoever.
The next questioner asked about inflation overshooting the Fed’s target. Here’s the relevant excerpt from Powell’s response:
“We’re going ahead and moving gradually and trying to navigate between two risks, really. One would be moving too quickly, inflation never gets back to target, if we do that. And the other is moving too slowly, and then we have—we have too much inflation or financial instability, and we have to raise quickly, and that can also have bad outcomes.”
Once again, Powell cited financial risks as a potential trigger for monetary tightening. And once again, his phrasing (namely, the conjunction “or”) suggested he could raise rates quickly even without an inflation threat. Whereas Yellen never once listed both inflation or financial instability as threats that could require aggressive tightening, Powell can’t seem to describe it any other way. To state the obvious, his two tightening criteria are two times as many as the single criterion (inflation) used by his predecessors—a neat math fact that explains why I called this the most hawkish turn in over thirty years.
Later in the press conference, a questioner asked about the neutral interest rate but included an add-on question about the inflation rate. Powell concluded his answer like this:
“It’s worth noting that the last two business cycles didn’t end with high inflation. They ended with financial instability, so that’s something we need to also keep our eye on.”
I enjoyed that he prefaced his conclusion with “It’s worth noting.” He seemed to be saying, “Look folks, you can ask about inflation all you like, and I’ll say all the right things. That’s what central bankers do. But we’re in the twenty-first century now—financial instability is the new inflation, and you might like to adjust your focus accordingly. By the way, I’ve already adjusted mine, aren’t you listening?”
Powell then fielded a question about President Trump’s trade war and began his answer like this:
“Sure. So, you know, as I mentioned earlier, I’m really committed to staying in our lane on things. We have very important jobs assigned to us by Congress and that’s maximum employment, stable prices, financial stability.”
With apologies to the youngsters, cue Chandler Bing asking, “Can he be any more subtly and smoothly obvious?” This fifth and last excerpt confirms that Powell’s a triple-mandate guy, referring to the Congressional mandates that everyone else describes as only full employment and stable prices, with financial stability being a separate though related issue. But Powell consistently blends the three together, which you would only do if you feel strongly that financial excesses are a monetary policy matter. In other words, the bits and pieces excerpted above all point to the same conclusion—he plans to react to financial excesses more hawkishly than Greenspan, Bernanke or Yellen did, and he’d like us to get used to the new approach.
Don’t Forget Who You’re Listening To…
Powell’s language strayed not only from his predecessors but also from his own prior comments—he spoke differently at his first FOMC press conference on March 21 than at the June press conference. In the earlier presser, he didn’t deliver any warnings similar to those excerpted above.
I can only guess at the reasons for waiting until June to make his move. He may have waited because stock prices were falling, or he may have decided to act as Yellen-like as possible while people get comfortable with him, or there may have been another reason altogether. Of course, new leaders often stress continuity when they assume power, since they can always sneak in the discontinuities later.
In any case, unless I missed an interview or an op-ed or a message in a bottle somewhere along the way, the June press conference offered the best look yet at Powell’s thinking. It also reinforced a speech he delivered on May 25, which hinted at a new approach but not as clearly as in the following month. And then in his latest speech on June 20, he continued to connect monetary policy with financial stability, once again claiming a triple mandate and stressing that financial excesses have bossed the third-millennium economy.
As I see it, the progression from March to May to June only adds to the sense that there’s a process of carefully altering the Fed’s message with regard to financial stability policies. Remember, the Fed prides itself on the power and precision of its communications—it even claims forward guidance as a policy tool. If you spend any time listening to speeches by FOMC members, you learn that your behavior and that of every other American is being shrewdly manipulated by the three or four pages of each six-weekly statement and the fifty or sixty minutes of each quarterly press conference. Or at least that’s the theory. So it seems unlikely that Powell would change the usual language, significantly and repeatedly, by accident.
Summary and Conclusions
To recap, Greenspan flatly rejected the notion that financial excesses should be a monetary policy matter, and he was backed by Bernanke, wholeheartedly, and then by Yellen, who ever so slightly qualified but made no effort to reverse his approach. But Powell appears to have turned the page on the thirty-year period of monetary policy makers insisting they’re not the right people to contain financial excesses.
The new Fed chief said that financial excesses are not only a monetary policy matter but one that’s first equal with employment and inflation. By implication and according to the warnings excerpted above, the FOMC could tighten policy in response to financial excesses even if inflation is well-behaved.
Essentially, Powell announced he’s not afraid to pop bubbles, meaning both asset-price and credit bubbles. Depending on how far he decides to take it, he could even act to prevent bubbles before they inflate. Setting aside the trickier question of whether he’ll be successful at something the Fed hasn’t attempted in many years, he certainly gave us plenty to think about.
Tags: asset-price bubbles, bank supervision, Ben Bernanke, credit bubbles, dual mandate, employment, federal reserve, financial excesses, FOMC, forward guidance, Global Financial Crisis, inflation, inflation targeting, Janet Yellen, Jerome Powell, macroprudential policies, monetary policy, monetary tightening, regulation, triple mandate