Tonight in Jackson Hole, Jay Powell will deliver his final speech in this central bankers’ lair. It’s often an important venue for getting messages across. Draghi, Bernanke, Yellen, and even Powell last year have seized this opportunity to announce shifts in their strategies.
Powell will speak at the close, and it’s anyone’s guess whether he’ll stick to a classic speech or whether he’ll instill some elements for his successor, and perhaps some digs at the American president who’s looking for every means to take power at the Fed.
What interests us is who will be appointed to succeed Powell, who will make a seminal speech on monetary policy at the Jackson Hole summit next year.
He will be a man of President Trump.
Recently, two Fed chairmen have been the American president’s men. Arthur Burns, in the early 1970s, was Richard Nixon’s man, adopting a very accommodating policy to meet the Republican president’s demands. Almost 10 years later, Jimmy Carter entrusted Paul Volcker with the mission of “killing” the inflation of the decade that was ending.
There is no doubt that the new strongman of the Fed will receive a precise mission letter from the tenant of the White House.
It is not yet clear what Donald Trump wants from the US central bank.
4 points
1️⃣The level of interest rates, always found too high even during his first term, is not enough to do everything to get rid of Powell.
2️⃣Monetary policy provides a dual view of the cycle. This is good, but it competes with the government’s view of macroeconomic dynamics and the measures to be adopted to correct the economic situation.
On both counts, economic theory teaches that a combination of accommodative fiscal and monetary policies is the best recipe for inflation and low growth.
3️⃣The third axis is what could be done with the Fed. Thanks to Trump’s will, we are witnessing the proliferation of monetary symbols. The large-scale advent of cryptocurrencies and stablecoins raises questions about the role of the Fed, which is in fact being overwhelmed.
Would its role simply be to buy government debt? This is generally not appropriate for a central bank seeking stability in prices, growth, and finance. When the central bank is in the palm of the government’s hand, the risk is a significant slippage.
4️⃣We will not escape the question of the disappearance of the central bank as an institution. The libertarians hovering around the White House are rather in favor of it and they will be able to find support in Congress with Rand Paul and a few others.
Perhaps then the real break will come. The future is far from being written.