An Urban's Rural View

Whither Interest Rates, Chairman Powell?

Urban C Lehner
By  Urban C Lehner , Editor Emeritus
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As Jerome Powell was wrapping up his first press conference, I turned from the television to my wife and said, "This guy was born to be the chairman of the Federal Reserve Board."

To which Nancy, whose strengths include asking smart questions, responded, "Is that good?"

"Well, yes," I blurted, sounding more confident than I felt. "It means he will be predictable."

The ensuing silence indicated Nancy's question had been merely polite. If she wanted to have a conversation about the Federal Reserve, she would have continued by asking why Powell was a natural central banker, or why predictability in central bankers was a good thing.

I realize that by now you may be empathizing with Nancy and thinking, "Do I really want to invest the next three minutes of my life reading about the new Federal Reserve chief?" Here, respectfully, is why you might want to.

If you're a commercial farmer, rancher or agri-business person, you need to understand what the Fed is up to. With the captaincy of the good ship Fed comes power over interest rate levels, credit availability and the health of the economy. What the captain does matters to your bottom line.

So here goes.

After the press conference, reviewing the highlights, I began to question my first impression. What had made me think Jerome Hayden "Jay" Powell was a born central bank boss? Unlike his immediate predecessors, Janet Yellen and Ben Bernanke, he is not a PhD economist. He's a lawyer by training, an investment banker by profession. Unlike Yellen and Bernanke, he answers questions directly, even tersely, avoiding digressions into economic theory. His first meeting with the press was 15 minutes shorter than Yellen's normal 60 minutes.

Unlike his more distant predecessors, Paul Volcker and Alan Greenspan, Powell isn't a man who will bend the Fed to his will through sheer force of intellect and personality. In this respect he does resemble Yellen and Bernanke. Like them, he's a consensus builder. He will lead by finding common ground among the members of the interest-rate-setting Federal Open Market Committee, or FOMC.

Yet for all the differences with his predecessors, Powell dodged and weaved in classic central-banker fashion. He was sometime clear, sometimes vague and always careful to stay on message. As often happens when a central banker speaks, different listeners heard different things. Some thought he sounded dovish, others hawkish. Put me in the latter category.

Powell appeared 30 minutes after the Fed announced that the FOMC had voted unanimously to raise the federal funds rate 25 basis points--a quarter of a percentage point -- to between 1.5 and 1.75% (http://tiny.cc/…). The increase was expected and left monetary policy in easy-money territory.

The Fed had also released the latest forecasts by individual FOMC members, which suggested Fed policy might need to turn more hawkish. The predictions were for faster economic growth, higher employment and a 2020 federal funds interest rate between 3.25% and 3.5%, high enough to slow the economy (http://tiny.cc/…).

The careful Powell urged the markets not to read too much into this: "The committee made one decision, and that was to raise the federal funds rate by 25 basis points" (http://cnb.cx/…). Everything else, he said, was just forecasts -- forecasts that could change.

The message Powell stressed was that the Fed would pursue a "middle ground" course between raising rates too slowly, which might allow the economy to overheat, and too quickly, which would throw the economy into recession. This would mean "further gradual increases in the federal funds rate."

This sounds clear enough, but the more you think about it the more you realize how vague it is. It begs the question of where the middle ground lies, leaving the answer to future inflation and employment data. It doesn't define the word "gradual." Even when being clear, Powell left the Fed plenty of maneuvering room.

In other words, he talked like a central banker. And yet, through all of his attempts not to be pinned down, Powell seemed pretty predictable.

He's suggesting, I think, that his Fed will tighten policy more aggressively than Yellen's. He's a Republican, and Republicans traditionally worry more about inflation than Democrats like Yellen. (In fairness, faced with the recent improvement in the economy, Yellen might have moved more aggressively, too.)

The more aggressive tightening won't be dramatic, as it would have been under either of President Trump's other two finalists for the job. Powell's a continuity and consensus guy.

Assuming Trump's trade-policy salvos don't lead to a trade war that hurts the economy, the Fed will raise interest rates a gradual quarter-point at least three and maybe four times this year. In a couple of years Powell's Fed will end up a few tenths of a percentage point higher than where Yellen's would have gone.

That's not good news for farmers, whose profits have been squeezed by low commodity prices. For them, every tenth of a percentage point in higher interest costs matters.

Is predictability good even if the prediction is for higher rates? For both markets and farmers, it's better to know a storm may be coming and have a chance to prepare for it than to be taken by surprise. A born central banker like Jay Powell will do his best not to surprise you.

Urban Lehner can be reached at urbanize@gmail.com

(ES)

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