Powell’s Soft Landing
It’s happening. The Federal Reserve raised the Fed’s Fund Rate to 1.0% and announced their plan to shrink the balance sheet. In the Q & A that followed, Powell shared his thoughts on the possibility of recession and what he thinks about the decision to reduce the nearly $9 trillion balance sheet.
When asked why the balance sheet reduction will commence on June 1, Chair Powell responded, (excusing for his grammar):
So why June 1, it was just pick a date, you know, and that happens to be that happened to be the date that we picked. It was nothing magic about it. You know, it's not going to have any macroeconomic significance over time. We just picked that.
He reassured reporters:
I wouldn't read anything into it. In terms of the effect, I mean, I would just stress how uncertain the effect is of shrinking the balance sheet.
Certainly, much can and should be read into this. Their plan is to reduce holdings of US Treasuries and Mortgage-Backed Securities by $47.5 billion each month, from June to August, and then beginning September to reduce by up to $95 billion a month.
This must not be taken lightly, since reducing the money supply has various effects on interest rates, interest expense, asset valuations, lending activity, as well as both consumer and entrepreneurial decision making. To say the effect is “uncertain,” shows Powell is either willfully ignoring both history, reality and Austrian economics, or simply doesn’t understand.
Surely, he must be concerned for the future since the topic of recession came out throughout his press engagement. The Chair believes:
Now, I would say I think we have a good chance to have a soft or softish landing or outcome, if you will.
The term “soft landing” gets used a lot, yet no one has ever described what exactly constitutes a soft landing. We can infer it to mean little economic pain or hardship, or avoidance of a recession, but it would be nice if the public were provided more detail.
As far as the Fed sees, the future shouldn’t be too bad. In his own words:
So it's a strong economy and nothing about it suggests that it's close to or vulnerable to a recession.
He continued to praise the strength of the economy and labor market. Even going as far to say that: “Businesses can't find the people to hire,” using this as proof of a strong jobs market.
At last, some references to Paul Volcker were made. One reporter asked if the Fed would:
…have the courage to endure recessions to bring inflation down if that were the only way necessary?
Powell didn’t provide a firm yes response, but referred to the possibility of “restrictive” policies instead:
So I think it's certainly possible that we'll need to move policy to levels that we see as restrictive as opposed to just neutral… If we do conclude that we need to do that, then we won't hesitate to do it.
Much can be taken away from Powell’s press conference, especially how the Fed doesn’t appear overly concerned about the inevitable bust it set in motion. However, it’s the word “courage” that really stands out. To assign a heroic trait to members of the Fed doesn’t really fit. Not because some, if not all of the Board of Governors are multi-millionaires, but because not one of them will ever be held accountable for any adverse consequences caused by their policies.
It’s difficult to find anything heroic because central planners have little to nothing to lose; when things turn for the worst and a recession follows, at best the Fed might claim it was a policy error or blame something else, but that would be the extent of their suffering.