Powell’s recent Jackson Hole Summit speech was mainly as expected. Well, except for the part where Powell obfuscated the truth behind the surge in inflation. More telling was the misunderstanding of the impact of fiscal and monetary policies on long-term outcomes.
Let’s begin with Powell’s assessment of the cause of inflation.
“The ongoing episode of high inflation initially emerged from a collision between very strong demand and pandemic-constrained supply. By the time the Federal Open Market Committee raised the policy rate in March 2022, it was clear that bringing down inflation would depend on both the unwinding of the unprecedented pandemic-related demand and supply distortions and on our tightening of monetary policy, which would slow the growth of aggregate demand, allowing supply time to catch up. While these two forces are now working together to bring down inflation, the process still has a long way to go, even with the more favorable recent readings.”
It’s crucial to note the complete dismissal of the causes behind the “collision between very strong demand and pandemic-constrained supply.” I suspect this was intentional to avoid placing blame at the feet of the current or previous administrations or themselves. However, it muddies the impact of their actions that created the problem.
While the Fed, the Government, and the media repeatedly blame everyone but themselves for inflation, from greedy corporations to individuals, the issue is, and always has been, basic economics.