Jerome Powell, the Chairman of the Federal Reserve, said extraordinary things in a May 13 speech. And to make sure his points were heard, Powell reiterated them on a May 17 60 Minutes interview.
The “extraordinary” part came from the context. Under normal circumstances, a central bank never gives policy advice to the government. Nor does a central bank chief speak of the economy in dire terms.
Yet Powell did both of those things, by way of his May 13 speech and May 17 interview, to make sure he was heard.
In terms of policy advice, Powell said:
“While the economic response has been both timely and appropriately large, it may not be the final chapter, given that the path ahead is both highly uncertain and subject to significant downside risks.”
Translation: We’re going to need more trillions.
To hammer home the point that Congress, not the Fed, will have to pony up more funds, Powell said:
“Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery. This tradeoff is one for our elected representatives, who wield powers of taxation and spending.”
In terms of economic damage, Powell said:
“The scope and speed of this downturn are without modern precedent, significantly worse than any recession since World War II. We are seeing a severe decline in economic activity and in employment, and already the job gains of the past decade have been erased.”
Translation: It’s really tough out there. Don’t lose sight of this.
In his 60 Minutes interview, Powell agreed with interviewer Scott Pelley that unemployment levels could rise to 20-25%, thus reaching or exceeding Great Depression levels.
In regard to the recovery, Powell said this:
“This economy will recover. We’ll get through this. It may take a while. … It could stretch through the end of next year. We really don’t know.”
When the Chairman of the Fed says, “this economy will recover,” that is another way of saying “this economy is not going to die.”
If someone has a sprained ankle, you don’t start off by saying “the patient will recover.” You don’t bring up the possibility of not recovering at all — or even implying as much — unless the situation is dire.
Powell’s message is not the rah-rah optimism of quick-recovery hope. It’s a way of pointing out the patient is in critical condition, and has a tough road ahead, but is likely to pull through.
Powell also used the phrase “no limit” in terms of the programs available to the Fed. This is the part that Wall Street liked — and the part bulls latched onto:
“There’s really no limit to what we can do with these lending programs. There’s a lot more we can do to support the economy, and we’re committed to doing everything we can as long as we need to.”
Powell also sought to emphasize we aren’t going to see a replay of the 1930s:
“When the Depression, well, when the crash happened and all that, the financial system really failed. Here, our financial system is strong.”
Once again, a message that boils down to “we won’t repeat the Great Depression” is not exactly optimistic.
It is more along the lines of pointing out how badly the system failed in the 1930s, with a solemn promise that this time — though the situation is equally serious — we are going to avoid those mistakes.
That is entirely accurate, by the way. The Federal Reserve is not going to make the same mistakes as the Fed of the 1930s. It may wind up making a different series of mistakes, though, leading to a new set of consequences both terrifying and fascinating. (Like a hyper-accelerated demise of the fiat-based global monetary system, for example.)
All in all, Powell’s message has the necessary bullish touches here and there — but is actually dark and grim when you read between the lines.
If that sounds familiar, it should. A few weeks ago, Warren Buffett was comparably gloomy.
Powell is the 16th Chair of the Federal Reserve. He is unique, in comparison to Fed heads that came before him, in that he has real-world experience in the fields of investment banking and private equity.
This suggests that Powell, through his time in markets as an active participant — advising companies, building companies, and investing in them — has a better handle on what makes markets tick than most central bankers do.
Powell also has extraordinary visibility as to what is happening behind the scenes. He is seeing data, in aggregate, that most individuals do not. He knows how stressed the system is.
This is why we find it notable, and unsettling, to see Fed Chairman Powell deliberately breaking long-standing rules of political etiquette — at his own peril, by the way — in order to deliver a multi-part message: We’re going to need more trillions; Congress should keep the checkbook open; this is Great Depression-level stuff; recovery is going to take a while.
It is thus ironic that “Don’t Fight the Fed” — an old Wall Street axiom — is being used to justify optimism via stimulus effects, with the Fed Chairman himself more or less saying: “Look, we’re going to need a bigger boat; what’s been done is not enough; our efforts alone won’t cut it.”