Jerome Powell apology template for Fed, inflation critics

Jerome Powell has taken a lot of abuse over the past few years. The chairman of the Federal Reserve was blamed for mischaracterizing the rise in inflation as “transitory” in 2021, a move that led him to keep interest rates close to zero well into the post-COVID recovery. And even after Powell admitted that he had miscalculated the path of inflation, which brought him down go back that “transitory” line and will resort to raising interest rates to combat the rise in consumer prices in March last year, he will not get the critics behind him. A new group has emerged that argues that the Fed chair is too aggressive in his rate hikes and could end up sending the economy into recession. But now, Jefferies chief market strategist David Zervos—who has stood by Powell for the past 18 months—is championing the cause amid economic stability, labeling Fed critics “Jay-haters ” and “Armageddonistas.” He even created a “Dear Jay” letter template for their convenience.

Powell’s criticism came into sharper focus earlier this year following the regional bank’s instability, headlined by the collapse of both. Silicon Valley Bank and Signature Bank in March. University of Pennsylvania Professor Jeremy Siegel, along with Yale’s Jeffrey Sonnenfeld and Steven Tian, ​​argued in March luck op-ed that the “shrapnel” from the Fed’s rate hike “killed” the SVB and “could send the economy into recession in the process.”

But despite constant warnings from the Fed’s critics, the recession isn’t here—at least not yet—and inflation is now down more than 4 percentage points from its June 2022 year-over-year peak. which is 9.1%, while the unemployment rate remains. at a 54-year low. Zervos saw this coming back in April, when he published a market commentary titled “Armageddon Fail” that destroyed consistent recession forecasts from economists and what he described as “discredited ” and “vitriolic” criticisms of the Fed’s rate hikes.

The former Federal Reserve Board adviser, who boasts decades of experience on Wall Street, said he believes the central bank’s rate hikes are having their intended effect, lowering inflation without causing a recession. . Powell has maintained the Fed’s credibility, kept the dollar strong, and courageously fought inflation despite potential economic pains, according to Zervos, who called the strategy “tough love.”

Announce the victory lap.

“Beating the haters is generally still one of my favorite pastimes,” he wrote in a letter on Monday. “And when I look at the bigger macro picture, away from the debate on regional banking stresses, those relentless criticisms of the Fed’s actions over the past 18 months require a new a beatdown.”

The critics

When it comes to Powell’s critics, the list is long and full of household names, including billionaire investor and Starwood Capital Group CEO Barry Sternlicht, who spoke out. luck in October that Powell and his “merry band of fools” were leading the economy toward disaster as they raised rates in the face of slowing GDP growth.

“I think they may not be up for the task,” he said SAYS of the current slate of Fed officials. “Maybe they’re not smart enough to understand the impact of their actions. It’s like, and I’m not kidding here, the inmates who run the asylum.”

William Spriggs of Howard University also advised Powell’s aggressive stance against inflation, comparing the economy to an airplane with failed engines that the rate hike threatened to kill completely in August.

“I think if they realize [and pause rate hikes] Before September, we can continue the recession, but it will be difficult because things are already slowing down in the labor market,” Spriggs SPOKE luck.

On Monday, Zervos argued that there is not much “new to say” to these critics on the macro front due to the drop in inflation and the stability of the economy, unless he wants to continue his victory. Instead, the strategist offered “an apology letter template” for his sarcastic comment.

“Today I thought I’d remind everyone how deluded the critics are by publishing an apology letter template for them to use as they learn their wrong ways,” he wrote. “I sincerely hope that some of those people, especially the ones with the highest profiles, can use something like this to come clean. It’s time for them to sincerely reconcile with Jay.”

Of course, some might argue that Zervos is celebrating too soon. Several investment banks—including Bank of America, Wells Fargo, Nomura, and others—believe that the recession will come this year. And even the Federal Reserve’s own staff has a mild recession as their “base case” for the economy. Nick Brooks, head of economic research and investment at private equity firm Intermediate Capital Group, also spoke luck Monday that despite recent economic strength many of the traditional indicators of recession “flashing red.”

Zervos’ letter highlighted the old debate, now renewed, in economics between monetarists from the line of Milton Friedman, who advocated a more laissez-faire approach to policy and believed that inflation was caused by excessive money supply growth, and the Keynesians. , who is named after the British economist John Maynard Keynes, and points to the lack of labor or capacity as the key driver of inflation.

Zervos, a monetarist, stands by his view that Fed Chair Powell did the right thing by rapidly raising rates since March of last year, arguing that nothing is more important than reducing the money supply to ensure price stability for the economy. And he has a request: “Please feel free to send this apology letter template to any of your friendly neighborhood Fed critics. I’m sure you’ll find more than a few out there .”

Here is the template:

Dear Jay,

I am truly sorry for doubting you since the summer of 2021. I mistakenly applied the wrong Keynesian demand-side theories to criticize your monetary policy decisions. Clearly, the post-COVID shocks that hit the global economy stemmed largely from the supply side. If I look closely at the inflation experience in Europe, where the slack in the labor market is greater than in the US, the supply story line is much clearer.

I also regret that I compared you to the late Arthur Burns. You rightly see that this adverse supply shock, which has persisted for much longer than initially expected, has created a serious risk of de-anchoring long-term inflation expectations. You then embarked on an aggressive tightening campaign to ensure that the hard work of rebuilding the credibility of the last 40-plus years at the Federal Reserve was not undermined. The tough love of slowing aggregate demand is the only response option to this shift in supply. And unlike Arthur Burns (or his predecessor Bill Martin), you didn’t give in to partisan calls to back off tightening efforts late last year. Finally, your policies ensure that the ghost of Burns never returns to the hallowed halls of 20th and Constitution Ave. And there is no doubt in my mind that Paul Volcker is currently watching from his perch on the top of central banking heaven. with an approving smile.

You should also be very proud that your policy efforts have kept long-term inflation expectations, the dollar strong, and term premiums low throughout the bad inflationary experience. It now appears that short-term inflation expectations, after earlier spiking, have returned to target levels. Every measure of the Fed’s credibility has remained intact over the last 18 months as you battle this supply storm that has brought us to peak 9% inflation. All I can say is, bravo, Jay!!

After realizing my wrong ways in the economy, I want to share with you that I will spend the next few years retooling. It appears that I have underestimated the important neoclassical/supply-side work of economists such as Lucas, Sargent, Wallace, and other freshwater macro theorists. Unfortunately, I’m hung up on old-school Keynesian demand side IS/LM based theories that crave things like the Hall consumption function and the Phillips curve. These concepts are obvious failures. My economics training required a complete pivot now. Thank you for helping me see the light.

I hope you can forgive me. I was really wrong. Your efforts are truly Herculean in this difficult time. Thank you for your tireless efforts to keep long-term inflation expectations anchored. Nothing is more important for maximizing long-term sustainable growth potential than low, stable, and anchored long-term inflation expectations. The American people owe you a lot for “keeping it going” in this epic inflation battle.

With deepest regret and sincerity,

[Insert a Jay-hater name here.]

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