The latest financial media fixation is the fictitious r*, another in our series of iffy conventional economics constructs. This is supposedly the “neutral” rate which neither stimulates nor depresses the economy. It’s a hypothetical variable whose only utility is to give talking heads something to talk about.
No one knows what it is. J Powell doesn’t claim to. J Powell doesn’t even care. Even if it were knowable it’s a moving target that would be quickly obsolete by the time it were discovered. It a “real” rate, too, which assumes knowledge of the rate of inflation, which itself isn’t known, least of all in the future. It also assumes that official interest rates are a reliable ‘speed regulator’ for the economy, another of economists’ unproved assumptions, not to mention demonstrably false just on the evidence of the past eighteen months. I won’t waste more time talking about it unless readers have questions or comments.
So on to more interesting stuff. The highlight of today’s Jackson Hole festivities was Federal Reserve Chairman Jerome Powell’s speech. Highly anticipated as it may have been, Powell’s main objective was to not break new ground. Satisfied with what the FOMC has been saying, he went out of his way to not rock the boat.
If there was anything newsworthy there, it was Powell firmly pushing back on the clamor to raise the Fed’s “inflation” target. This is good news on multiple fronts. First of all, for the long suffering millions in America whose living standards have already taken a hit from inflation. It’s good news for a bond market already buckling under the weight of monster government borrowing, as we discussed in It’s Not About The Fed. We discussed the significance of the inflation target in more depth in It’s About The Fed.
The last thing the beleaguered bond market needs is to have to also factor in yet higher forward inflation. A mere crack in the door would have kneecapped the Fed’s credibility and panicked the bond market, forcing the Fed to rush into pivoting from inflation fighting mode to inflation creating mode. Debt monetization would become urgent, crashing the dollar and destroying what remains of ordinary Americans’ purchasing power. Powell may not get everything right in our book, but isn’t stupid.
As we’ve also argued, Wall Street’s hysterics over tight monetary policy have nothing to do with concern for the American economy. It’s the Wall Street economy that Wall Street is worked up about. As we’ve also pointed out ad nauseum, it’s necessary for stock prices to take another leg down to quell inflation further down the pipeline in consumer prices. That doesn’t necessarily involve mass unemployment or any of the other horrors Wall Street fearmongering warns of. There could be something that could be called a “recession” or “hard landing”, but that would be a consequence of the implosion of a bubble, which, as J Powell knows, would only be made worse by continuing to defer it to tolerate higher inflation; “We will need price stability to achieve a sustained period of strong labor market conditions that benefit all”.