Finance / SNB

A Glimpse at Fed Thinking

On September 6th, 2019, Fed Chair Jerome Powell and SNB president Thomas Jordan offered a glimpse at their institutions’s thinking during a joint Q&A organised by the SIAF at Zurich university.

The most striking point was the contrast between Powell and Jordan regarding their ambition to fine-tune the economy. The dual mandate of the Fed – stable prices and maximum employment – puts it in the driver’s seat of the economic engine, irrespective of whether it wants that role or has the tools to deliver the expected result. The SNB has but a single mandate, price stability.

Based on its mandate, the Fed feels obliged to ease monetary conditions at present, in the 11th year of the current expansion, even though the US economy is strong according to Powell: high job creation and no recession in sight. But there are some risks at the horizon, trade disputes and a cooling in many countries across the world. So why should this be sufficient to motivate renewed easing of monetary conditions? The reason seems to be an unease because established economic models have reached their limits. So it’s not the threat of real economic problems but the fear that inflation would again fall, making it harder for the Fed to take meaningful problems in the future should real problems arise.

The Fed reviewed its tools and concepts for the last time at the end of the 70ies where it had become obvious that something needed to be done to contain a long and escalating period of inflation. This review led to the Volcker tightening.

At present, the Fed feels a renewed need for such a policy review. They still think they need to cut interest by 550 bp to counteract a recession. At a federal funds rate of below 2% and 10y gov’t bonds trading at 1.6%, this clearly has become impractical.

The Fed is therefore thinking of adapting its inflation target of 2%, possibly even embracing symmetric targeting of that rate.

Powell said that they think that the neutral rate of interest may have come down by 2-3% vs. the past due to ageing, low productivity and low inflation. Jordan also sees that this has reduced the room for menouvering for central banks. Only he can take it more lightly since as long as inflation stays low, he does not need to maneouver to fulfil his mandate!

When questioned about Libra – the Facebook crypto-currency – Powell remained doubtful. There is no way that the U.S. would allow such a currency to bypass all the rules and regulations they have put in place for the USD and by proxy for the entire International Monetary System.

The Fed would have a mandate to regulate Libra if it became systemically important which could happen very quickly. And that is not even talking about the DOJ’s and the Treasury’s regulations against money laundering, tax evasion, the financing of terrorist organizations, and for the implementation of sanctions.


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