No, Jerome Powell Isn’t Playing Politics

Today’s Points:

  • Despite appearances, Jerome Powell probably isn’t playing at politics;
  • But that won’t convince the skeptics that the Fed isn’t propping up the stock market;
  • There are legitimate questions over central bank independence;
  • A presidential campaign isn’t the best place to air those questions
  • AND happy 98th birthday to the great David Attenborough

Powell’s Staying the Course

Investors’ hopes for rate cuts this year have faded. The past quarter’s economic data showed that the inflation battle is not over; whether the Fed eases now depends on the data, a point Jerome Powell and the Federal Reserve have repeated ad nauseam. Then came last week’s nonfarm payrolls data for April, it was cooler than expected, and that was enough to re-establish hopes that cuts are back on the table — although investors still don’t expect the first cut until November, according to the Bloomberg World Interest Rate Probability function.

That would mean delaying until just after the intensely competitive US presidential election — and it’s no surprise that the Fed’s policy initiatives are being viewed ever more through a political lens. Conservatives have been forthright in their criticisms of the Fed in a manner that raises questions about whether the Fed would maintain its independence under a second Trump administration.

There are legitimate reasons to question central banking independence as it currently operates; when Powell was renominated as Fed chair, this column’s headline was The Fed Has Risen Too Far Above Political Control. But tinkering with its status needs to be done with great care, as it risks ratcheting up uncertainty and thus disturbing capital markets. And beyond that, it’s hard to overstate the usefulness of an independent central bank. The end of the dollar’s tie to gold in 1971 led to a period of savage inflation. Prices only came under control after the Fed, under Paul Volcker, proved itself willing to force a recession. Since then, a fiercely independent central bank has come to be seen as essential to maintaining confidence in the currency. But there will be no lack of politicization claims should the Fed decide that the data permit the loosening of policy ahead of the election after all. Gavekal Research's Will Denyer argues he doesn’t see the Fed departing from its data-dependency stance: