Powell Lauds Greenspan Fortitude Amid Uncertainty: Jackson Hole

Aug 26, 2018 News

Powell Lauds Greenspan Fortitude Amid Uncertainty: Jackson Hole

Cleveland Federal Reserve President Loretta Mester discusses the Fed’s inflation goal.

Federal Reserve Chairman Jerome Powell praised the performance of former central bank leader Alan Greenspan for keeping interest rates low in the late 1990s. Greenspan spotted a productivity boom, created by expanding use of computers, before it was clear in the data.

The comparison was one of the highlights as discussions kicked off on Friday at the Jackson Hole, Wyoming annual symposium of central bank officials.

While Powell said U.S. productivity has been low for a decade or longer, his comments suggest he would want to accommodate with low interest rates any rise in efficiency across the American economy. President Donald Trump’s economic advisers have argued that the administration’s tax overhaul and cuts in regulation are designed to lead to greater investment and higher productivity.

“Chairman Greenspan had a hunch that the United States was experiencing the wonders of a new economy in which improved productivity growth would allow faster output growth and lower unemployment, without serious inflation risks,” Powell said. “Thanks to his considerable fortitude, Greenspan prevailed.”

In the late 1990s, with the Fed holding off on rate increases, the U.S. economy enjoyed its longest expansion ever and inflation fell rather than rose.

Powell praised the “risk management” style of decision making that was typical of the former chairman. Greenspan was dubbed the “maestro” of the U.S. central bank for his skilled stewardship in the 1990s, when policies were partly set based on his gut instincts rather than on clear data or mechanical rules. Greenspan’s reputation suffered, though, from the 2007-2009 recession caused by the housing crisis after the Fed failed to regulate subprime mortgages effectively.

Don’t Blame Lax Antitrust

Jackson Hole’s official theme this year is the implications of increasing market concentration and what it means for competition, consumers and workers if a a few superstar firms such as Amazon.com Inc. control ever-larger market shares in many industries. Amazon chief economist Patrick Bajari has been invited.

In the opening paper presented to the conference, economist John Van Reenen argued that new technologies and globalization have amplified the advantages enjoyed by the largest and most productive companies, propelling them to their dominance.

Mester vs Bullard

Cleveland Fed President Loretta Mester said the case for raising interest rates is “pretty compelling” given the economy’s strength, reinforcing expectations that the central bank will boost borrowing costs at its next meeting in September.

“We have an economy that’s growing above trend, we have low unemployment and we have inflation at basically our goal of 2 percent,” Mester said in a Bloomberg Television interview with Michael McKee at Jackson Hole. “This gradual increase in rates seems to be a very compelling case right now, given that we are accommodative still on monetary policy.”

She downplayed concern that the flattening Treasury yield curve signals that the U.S. is approaching a recession, as it has indicated in previous expansions. Other reasons for the narrower gap between short-term and long-term rates include demand for safe assets such as Treasuries, as well as bond purchases by central banks around the world, Mester said.

In contrast to Mester’s views on the yield curve, St. Louis Fed chief James Bullard, an outlier in his view that the U.S. central bank shouldn’t be raising interest rates, said the Fed should heed the signals from the bond market and dial down the urgency to be preemptive against fighting inflation.

“There is no reason to challenge the yield curve at this time,” he said earlier Friday in a Bloomberg TV interview with McKee. “Inflation is low, it is stable, it is barely up to target. We don’t need to be preemptive on the yield curve.”

Bullard votes next year on the policy-setting Federal Open Market Committee. Mester votes in 2018.

Draghi, Kuroda Sit it Out

Powell’s speech was his first as Fed chairman at Jackson Hole. Neither his European Central Bank and Bank of Japan counterparts were in the audience this year, with Mario Draghi and Haruhiko Kuroda’s names both missing from the list of attendees.

Other highlights from the attendee list include confirmation that none of the ECB’s executive board members will make the trip to the central-banking retreat in Wyoming’s Grand Teton National Park.

Policy makers gathered against a backdrop of strong U.S. growth though the global economic outlook is less rosy. Trump’s trade war threatens China, while Turkey and other vulnerable emerging markets have been buffeted by financial market turmoil. Trump has also turned his ire on the Fed chief, who he picked, for raising interest rates.

Powell will be joined by both current Fed governors, Lael Brainard and Randal Quarles, as well as Fed governor nominee Marvin Goodfriend. All 11 current regional Fed presidents will be there. The San Francisco Fed has a vacancy at the top.

Here’s What Happened Thursday:

  • Two regional Federal Reserve bank chiefs say they favor further interest-rate increases and Trump criticism wouldn’t influence U.S. central bank policy
  • Powell’s Speech Title Mirrors 1998 Paper Reflecting Same Debate
  • Jackson Hole History Suggests Market Calm to Follow Powell Debut
  • Fed Staff Paper Warns Officials Not to Ignore Low Unemployment

— With assistance by Michael McKee, Steve Matthews, and Randy Woods