In a rare moment of honesty, Federal Reserve Chairman Jerome Powell admitted he and his fellow central bankers don’t know what they’re doing as they wrapped up the May Federal Open Market Committee (FOMC) meeting.
As was expected, the Fed held interest rates steady at the meeting, taking a “wait and see” attitude.
“There’s just so much that we don’t know,” Powell conceded. “I think, and we’re in a good position to wait and see, is the thing. We don’t have to be in a hurry.”
Uncertainty was the theme of Powell’s post-meeting press conference, as he focused on the unknown impact of tariffs on the economy.
During a speech at the Economic Club of Chicago last month, Powell set up tariffs as a scapegoat as the inevitable effects of the Fed’s reckless monetary malfeasance during the pandemic and the Great Recession play out. He doubled down on the theme during the post-meeting press conference, lamenting, “There’s so much uncertainty about the scale, scope, timing, and persistence of the tariffs.”
The official FOMC statement also expressed worry about the impact of tariffs, saying, “Uncertainty about the economic outlook has increased further.”
Specifically, the committee said it “is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen.”
If only there were a word for an economic slowdown with high unemployment coupled with rising prices.
Oh, wait, there is.
Stagflation
Powell said it was “too early” to know whether inflation or economic weakness would be the biggest problem.
And how long will it take before there is more clarity?
Powell said he doesn’t know.
“I can’t tell you how long it will take, but for now, it does seem like it’s a fairly clear decision for us to wait and see and watch.”
Powell & Company also failed to provide any hints on the future direction of monetary policy because – they don’t know.
Powell did rule out the possibility of a preemptive rate cut to offset the impact of tariffs.
“It’s not a situation where we can be preemptive, because we actually don’t know what the right responses to the data will be until we see more data.”
When asked about the national debt and ever-growing deficit spending, Powell stated the obvious – it is “on an unsustainable path.” However, the Fed chair refused to offer any solutions.
“I think they don’t need my advice and our advice on how to do fiscal policy, any more than we need their advice. It’s on Congress to figure out how to get us back on a sustainable path.”
Fed People Never Really Know What They Were Doing
Powell’s admission that the central bank doesn’t know what to do next or how things are going to play out is a rare moment of honesty from a central banker. Fed people like to maintain the illusion that they are in control. They want you to believe they're wise and knowledgeable, equipped with the tools and brainpower necessary to guide the economy through thick and thin with calm hands firmly on the tiller.
But as Jim Grant once put it, “We have been used to, I think, imputing to the Fed immense powers of foresight and control. But oftentimes, the Fed, like so many of us, finds itself not in the vanguard of action or thought, but rather running behind to catch up.”
The fact that the people who set interest rate policy only forecast the correct trajectory of future interest rates about a third of the time is telling.
The fact of the matter is, Fed members aren’t scientists with crystal balls. They are politicians with strong academic backgrounds.
“We have decided over the course of many years to conduct our monetary affairs by kind of a Ph.D. standard of improvisation,” Grant said.
Fed officials rarely admit they are improvising. Apparently, Powell decided it was politically expedient to do so in the current situation with the president breathing down his neck, demanding rate cuts.
By the way, that’s not an unreasonable request given the massive levels of debt in this bubble economy.
On the other hand, it’s not unreasonable to hold rates higher for longer given inflation.
This is the Catch-22 I wrote about back in January before Trump was even inaugurated.
I’ve been saying for months that the central bank never did enough to slay the inflation dragon it resurrected with its massive money injection during the pandemic. It needs to hold rates higher for longer, and likely raise rates, to truly get inflation under control.
On the other hand, this debt-riddled bubble economy can’t function in a high-interest rate environment. It needs its easy money drug.
In other words, the Fed needs to simultaneously raise rates to battle price inflation and cut rates to keep the air in the bubbles.
It can’t do both.
Powell and his fellow central bankers have been walking a tightrope for a long time. He acknowledged it last month during his Economic Club of Chicago speech. As the AP described it, “The Fed would essentially have to choose whether to keep interest rates high to fight inflation or cut them to spur growth and hiring.”
“Our tool only does one of those two things at the same time,” Powell said during a Q&A session.
No wonder Powell has taken the “we don’t know, wait and see” position. What else can he do?
But it’s important to remember that the Fed is always in this position. Monetary policy isn't a science. It's more akin to throwing darts at a dartboard.
There is no way a few economists, even if they’re well-meaning and have PhDs, can obtain, categorize, parse out, and understand the ramifications of all the data necessary to map out the trajectory of the economy. Central bankers have a knowledge problem. They don’t know what they don’t know.
And coupled with a hubris problem, this is a bad combination.
Mike Maharrey is a journalist and market analyst for Money Metals with over a decade of experience in precious metals. He holds a BS in accounting from the University of Kentucky and a BA in journalism from the University of South Florida.
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