Powell’s speech yesterday

Jerome Powell gave a speech at Stanford University yesterday with a Q&A afterwards. Powell stayed dovish (in contrast to Christopher Waller late last week.) What I found more interesting was that Powell refuted many of the current discussions as to why the Fed shouldn’t or won’t lower interest rates as much as previous business cycles. Some quotes:

1. Powell doesn’t think anything is “broken” with monetary policy transmission. Because the economy hasn’t meaningfully slowed yet after the Fed’s hiking campaign, some wonder if there is something “broken” with the Fed’s ability to slow the economy. Powell alludes to the lag effects of Fed policy. He said [my bolding],

“I guess the headline for me is that I do think monetary policy is working and working broadly as expected.”

And,

“I think it’s not right and maybe too soon to conclude that there is some significant disconnect there in terms of monetary policy transmission.”

2. On artificial intelligence (AI) and productivity. AI has been linked to recent higher productivity by some and cited as a reason why the Fed’s neutral rate should be higher and the Fed shouldn’t lower rates much. Powell thinks it is too soon for AI to be affecting the productivity numbers. Powell said,

“It [AI] should increase productivity, everyone sees that, but that is not what we are seeing in the numbers now. It is too soon for AI, I think, to be affecting the productivity numbers.”

3. On the Fed’s neutral interest rate specifically. Powell dismissed trying to figure out what the neutral rate is now,

“The question of what will be the equilibrium interest rate, the neutral interest rate, going forward—doesn’t really matter for policy today. What we are really asking about is once the pandemic is well and truly behind us, and we are well into the AI investment boom and the effects of AI, what will that look like? It doesn’t really matter that much for getting inflation down to 2% while keeping the economy growing and the labor market strong.”

Overall, Powell was dismissive of the idea that the Fed needs to plan for fewer rate cuts because of structural changes to the economy (i.e. that the neutral rate is higher.) Discussions of a higher neutral rate are just veiled arguments for tighter policy while the economy looks ok. Larry Summers has been on the warpath about this recently. But, when the economy begins to fall, the discussion quickly pivots to providing accommodation without regard to what the neutral rate is. I think Powell has a sense of the business cycle beyond what the economic numbers look like today and is trying to plan for a downturn. He gave a strong defense for cutting rates yesterday.