Wednesday, July 17, 2024

Jerome Powell Apology to Fed, Inflation Critics Template


Jerome Powell has taken a lot of abuse over the years. The Federal Reserve chairman was blamed for mischaracterizing the rise of inflation in 2021 as “fleeting”, a move that prompted him to keep interest rates close to zero after the COVID recovery. And even after Powell admitted that he had miscalculated the trajectory of inflation, he went back on that “fleeting” line and turned to interest rate hikes to fight consumer price increases in March last year. He could not pat his critics on the back. A new group emerged that argued that the Fed chairman was being too aggressive with his rate hikes and could send the economy into recession. But now, Jefferies chief market strategist David Zervos—who has stood by Powell over the past 18 months—is taking a victory lap amid the economy’s resilience, branding Fed critics “J-haters” and “Armageddonistas.” are doing. He has also created a “Dear J” apology letter template for their convenience.

Powell was particularly criticized after regional bank instability earlier this year, headlined by the collapses of both Silicon Valley Bank and Signature Bank, which occurred in March. Professor Jeremy Siegel of the University of Pennsylvania argued in March with Yale’s Jeffrey Sonnenfeld and Steven Tian Luck op-ed that “shrapnel” from the Fed’s rate hike “killed” the SVB and “could send the economy into recession in the process.”

But despite Fed critics’ frequent warnings, a recession has not arrived – at least not yet – and inflation is now down more than four percentage points from its June 2022 year-to-date peak of 9.1%, while the unemployment rate remains is at a 54-year low. Zervos saw this coming back in April, when he published a market commentary titled “Armageddon Fail,” which criticized economists’ persistent recession predictions and which he called the Fed’s rate hikes “discrediting” and “vitriolic.” described as a criticism.

A former adviser to the Federal Reserve Board who claims decades of Wall Street experience says he believes the central bank’s rate hikes have had the desired effect, reducing inflation without causing recession. . Powell has maintained the Fed’s credibility, kept the dollar strong, and fought bravely even in the face of potential economic pain, according to Zervos, who called the strategy “tough love.”

Why win lap?

“Beating the haters is still one of my favorite pastimes,” he wrote in Monday’s note. “And when I look at the bigger macro picture, away from the debate over regional bank stress, those who have been consistently criticizing the Fed’s actions over the past 18 months are in dire need of a fresh beating.”


When it comes to Powell critics, the list is long and full of household names, including billionaire investor and CEO of Starwood Capital Group Barry Sternlicht, who pointed out Luck Last October, Powell and his “cheerful band of gunnatics” were driving the economy to disaster as they raised rates to stifle GDP growth.

“I think maybe they are not up to the task,” he said of the current slate of Fed officials. “Maybe they’re not smart enough to understand the ramifications of their actions. It’s kind of, and I’m not kidding here, the inmates running the asylum.

William Spriggs of Howard University also denounced Powell’s aggressive inflation-fighting stance, comparing the economy to a plane with a failed engine, which threatened to halt rate hikes altogether last August.

“I think if they come to their senses [and pause rate hikes] Before September, we may be able to exit the recession, but it will be tough because things are already slowing down in the labor market. Luck,

On Monday, Zervos argued that given the declining trend of inflation and the resilience of the economy, there was “not much new to say” for these critics on the macro front, unless he continues his victory lap. Wanted to Instead, the strategist offered an “apology letter template” in his sarcastic comment.

“Today I thought I’d remind everyone just how delusional those critics are by publishing an apology letter template for them to use as they come to grips with their misguided ways,” he wrote. “I sincerely hope that some of them, especially the highest profile ones, can do something like this to come clean. It is time for them to make heartfelt amends with Jay.

Of course, some might argue that Zervos is celebrating too soon. Many investment banks, including Bank of America, Wells Fargo, Nomura and others, believe a recession is coming this year as well. And even the Federal Reserve’s own staff still have a mild recession as their “base case” for the economy. Nick Brooks, head of economic and investment research at private equity firm Intermediate Capital Group, also pointed out Luck Monday that many traditional recession indicators are “flashing bright red” despite recent economic resilience.

Zervos’ letter highlights a centuries-old debate in economics now renaissance between monetarists of the line of Milton Friedman, who promote a more laissez-faire approach to policy and believe that inflation is caused by excess growth in the money supply. and Keynesian, which are named after the British economist John Maynard Keynes and point to a shortage of labor or ability as a major driver of inflation.

Zervos, a monetarist, stands by his view that Fed Chair Powell has done the right thing by raising rates sharply since last March, arguing that the money supply needs to be increased to ensure price stability for the economy. Nothing is more important than doing less. And he has a request: “Please feel free to forward this apology letter template to any of your friendly neighborhood Fed critics. I’m sure you can find more than a few out there.”

Here’s the template:

dear jay,

I’m really sorry for doubting you since summer 2021. I misapplied flawed Keynesian demand-side theories to condemn your monetary policy decisions. Clearly, the post-COVID shocks affecting the global economy have mainly come from the supply side. If I had looked more closely at the inflation experience in Europe, where labor market slack was much greater than in the US, the supply-side story would have been much clearer.

I am also deeply sorry for comparing you to the late Arthur Burns. You correctly observed that this adverse supply shock, which persisted for much longer than initially anticipated, posed a serious risk of de-anchoring long-term inflation expectations. Then you embarked on an aggressive tightening campaign to ensure that the hard work the Federal Reserve had done over the past 40-plus years to rebuild credibility was not undermined. Tough love was the only option to slow aggregate demand in response to this supply shock. And unlike Arthur Burns (or his predecessor Bill Martin), you didn’t heed partisans’ call to back down from the tough efforts late last year. In the end, your policies ensured that Burns’ ghost never returned to those hallowed halls at 20th and Constitution Avenue. with an approving smile.

You should also be extremely proud that your policy efforts have kept long-term inflation expectations in check, the dollar strong and term premiums low throughout this unpleasant inflationary experience. It also now appears that short-term inflation expectations, after rising initially, have returned to target levels. Every measure of the Fed’s credibility has been completely intact over the past 18 months as you battled this supply-side storm that brought us to a peak of 9% inflation. All I can say is, Bravo, Jai!!

After realizing my misguided economic ways, I wanted to share with you that I will be spending the next few years in retreat. It certainly appears that I have underestimated the important neoclassical/supply-side work of economists such as Lucas, Sargent, Wallace and many other freshwater macro theorists. Sadly, I’m hung up on old-school Keynesian demand-side IS/LM-based theories, iconic things like Hall’s consumption function and the Phillips curve. These concepts clearly fail. My economics training now requires a full pivot. Thank you for helping me see the light.

I sincerely hope that you can forgive me. I was totally wrong. Your efforts during these difficult times were indeed immense. Thank you for your tireless efforts in keeping long-term inflation expectations stable. Nothing is more important to maximize sustainable long-term growth potential than low, stable and long-lasting inflation expectations. The American People Are So Grateful To You For “Keeping It Up”, During this epic inflation battle.

With both deep regret and sincerity,

[Insert a Jay-hater name here.]