What Jerome Powell Didn’t Do: Lay the Groundwork for Higher Rates

With language like that, he was declining to embrace the use of “open-mouth policy,” or of essentially trying to assuage inflation fears by using more specific language to suggest the Fed had a hair-trigger readiness to take immediate action to head off higher prices.

He appeared to be applying the lessons of the 2010s labor market in setting the central bank’s course. Over that decade, unemployment kept falling lower, with participation in the work force rising higher than many analysts had thought plausible. With hindsight, the Fed may have erred by raising interest rates prematurely, slowing that process of labor market improvement.

In a 2021 context, that means allowing more post-pandemic healing of the labor market before assuming, for example, that many of the Americans who currently say they are not in the labor force will return as public health conditions improve.

“There’s room for a whole lot of humility here as we try to think about what maximum employment would be,” Mr. Powell said. The last economic cycle, he said, showed that “over time you can get to places that didn’t look possible.”

He also appeared to be deploying another lesson from the 2010s — namely those learned in the 2013 “taper tantrum” when global markets went haywire as Chair Ben S. Bernanke moved to taper the Fed’s bond purchases.

A key lesson of that era is that tapering needs to be telegraphed far in advance, and separated as much as possible from the decision to raise interest rates. In that episode, markets experienced a double-whammy as they envisioned both a winding down of the Fed’s bond buying and rapidly raising rates.

With his assurances Wednesday that the Fed wasn’t in a hurry to raise rates, Mr. Powell was essentially trying to avoid that problem.

Article source: https://www.nytimes.com/2021/11/03/upshot/powell-fed-rates-inflation.html