The most consequential words ever spoken by a central banker are, without doubt, ECB chair Mario Draghi’s 2012 promise to “do whatever it takes” to stop the bleeding of the Great Recession and keep the eurozone from spinning apart. Specifically:
“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”
The global financial markets responded to Draghi’s promise like a dog presented with the mother of all soup bones, leading people who love the modern monetary system to see Draghi as a hero — while those who view fiat currency and fractional reserve banking as abominations see him as the Devil. But everyone sees him as effective.
So it’s not a surprise that the Federal Reserve, in its search for words to keep the debt binge going, has dusted off Draghi’s formulation:
Federal Reserve Chairman Jerome Powell said the central bank is watching current economic developments and will do what it must to keep the near-record expansion going.
Financial markets have been nervous lately over an escalating trade war that has spread from China and now could include Mexico. At the same, government bond yields are behaving in a way that in the past has been a reliable recession indicator.
Powell began a speech Tuesday in Chicago by addressing “recent developments involving trade negotiations and other matters.”
“We do not know how or when these issues will be resolved,” he said in prepared remarks. “We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.”
Powell’s comments came at the “Conference on Monetary Strategy, Tools and Communications Practices,” a kickoff for an examination the Fed is conducting this year about the tools it has to meet its goals as well as the way it is communicating its actions to the public.
He did not address any other specific issues relating to current conditions. Market are broadly expecting the policymaking Federal Open Market Committee to cut its benchmark rate twice before the end of the year in response to current conditions.
For his part, Powell has stuck to the position that the Fed remains data dependent. The most recent FOMC statement, from its May meeting, indicated that the committee is taking a patient stance toward policy changes at conditions evolve.
Looking down the road
In his speech Tuesday, Powell took a longer view, outlining the challenges the Fed faces ahead for when the next crisis hits. The current low rate environment leaves the Fed little room before it hits the zero lower bound, or the point where the Fed’s nominal benchmark rate can’t be lowered much more.
“In short, the proximity of interest rates to the ELB has become the preeminent monetary policy challenge of our time, tainting all manner of issues with ELB risk and imbuing many old challenges with greater significance,” he said.
The Fed faces a problem with inflation, which has yet to sustain at the central bank’s 2% goal. Powell said persistently low inflation could lead to “a difficult-to-arrest downward drift” in expectations.
Powell said the tools used during the crisis — near-zero rates and asset purchases that took the balance sheet to more than $4.5 trillion — are likely to be deployed again.
“Perhaps it is time to retire the term ‘unconventional’ when referring to tools that were used in the crisis. We know that tools like these are likely to be needed in some form in future ELB spells, which we hope will be rare,” he said.
Powell seems like a regular guy who’s is in a tough spot not of his own making. He recognizes that interest rates are too low to provide much ammo in the next downturn, so he’s desperately hoping that the trade war and political chaos will be resolved shortly, goosing stock prices and extending the expansion. In the meantime he’s saying words he knows the markets like to hear (which they clearly do: the Dow is up 400 points this morning).
But he also seems to know he’s just delaying the inevitable. In the next recession, which history says is imminent, he’ll be forced to cut interest rates the usual five or so percentage points, taking the US and the rest of the world deeply into negative territory, with consequences neither he nor anyone else can predict.