Powell Changes The Rules On QE

The markets took a tumble to start this week as rising interest rates and inflationary pressures begin to weigh on outlooks. Those worries quickly diminished as Jerome Powell changed the rules to reassure Wall Street that “QE” is here to stay.

In his speech, he committed to reaching maximum employment and the “average” inflation rate. To wit:

“I’m confident that we can, and that we will, and we are committed, to using our tools to achieving that. The three-year time frame is actually arbitrary and chosen by us. And you know, we’re just being honest about the challenge.

We live in a time where there are significant disinflationary pressures around the world. Essentially all major advanced economies’ central banks have struggled to get to 2%. We believe we can do it, we believe we will do it. It may take more than three years, but we’ll update  our assessment every quarter. We’ll see how that goes.”

Even Fed Governer Lael Brainard echoed Powell’s statement:

“The economy remains far from our goals in terms of both employment and inflation, and it will take some time to achieve substantial further progress.”

The markets immediately interpreted these statements correctly. The Federal Reserve will not be tightening monetary policy any time soon.


The Constraints To Policy

If you re-read Powell’s statement, you should realize that he has changed Fed policy’s benchmarks.

When Ben Bernanke initially launched QE, the “constraints” around ultra-accommodative monetary policy were price stability and full employment. Those “guideposts” were  2% inflation and 5% unemployment as measured by the U-3 report from the Bureau of Labor Statistics.

Over the last decade, the Federal Reserve stated that an “accommodative policy” was necessary to achieve 2% annualized inflation. Unfortunately, inflation ran well below the target level the majority of the time.

Powell Changes Rules QE, #MacroView: Powell Changes The Rules On QE.

When it came to reaching the goal of “full employment,” the Fed achieved that goal for only a brief period between 2016-2018. At this juncture, the Federal Reserve did try to lift interest rates and reduce their balance sheet. Unfortunately, as we warned, the outcome was not positive.

Powell Changes Rules QE, #MacroView: Powell Changes The Rules On QE.

The issue with the U-3 report following the “Financial Crisis” was that it only “appeared” the economy regained full-employment. In reality, such was merely a function of a shrinking “labor force.” To wit:

“Furthermore, employment, which is the backbone of consumer confidence, has not increased strong enough to create sustainable economic growth above 2%. Notably, the number of full-time jobs, which are critical to sustaining a family, has continued to decline.”

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