In June 2011 an op-ed titled “When a Nobel Prize Isn’t Enough” appeared in the pages of the New York Times. In it MIT professor Peter Diamond—who had won the Nobel Prize in economics for his work on unemployment and the labor market—pled his case. The Obama nominee chastised partisan Republican senators who had thwarted his confirmation. He simultaneously argued that sound analysis of unemployment is crucial to conducting monetary policy.

Eight years later, the curriculum vitae of President Trump’s proposed nominee, Stephen Moore, pales in comparison to Diamond’s. The litany of disqualifiers is long. For starters, he is uncredentialed in academic economics—or at best self-taught. The same is true, however, of Fed Chairman Jay Powell, a detail of which Mr. Moore was apparently unaware when he recently stated that Powell had “spent his whole career” at the Fed. Rather, Mr. Powell had a long career in private equity before joining the Fed in 2012 and being elevated to chairman by Trump in February 2018. Three months ago during a conservative radio talk show interview, Moore asserted that Powell should be fired for “economic malpractice.” Strange the critique would come from Moore. Such is the pot calling the kettle black.

The Pretense of Knowledge[1]

What of the importance of academic credentials? Nobel Prize winner Diamond had them, as have many past nominees, whether confirmed or not. In his Nobel acceptance speech in December 2011, he spoke in detail about patterns of hiring in the American economy and concluded that “structural unemployment and issues of mismatch were not important in the slow recovery we have been experiencing, and thus not a reason to stop an accommodative monetary policy.” History suggests that Prof. Diamond may have been off the mark on both counts. In the real world of policy setting, a Nobel Prize may not be enough.

Even highly accredited sitting Fed chairs are prone to occasionally glaring miscalculations, particularly at economic inflection points. The most ardent endorsement of Moore thus far is from his former colleagues on the editorial board of the Wall Street Journal. Could it be that the editors damned him with faint praise on March 29? “Steve Moore for the Fed—If Making Wrong Forecasts Is a Problem, He Has Lots of Company.” Perhaps lifting him up by tearing others down, the board had Ben Bernanke in its sights for his two most infamous miscues:

1) As a Fed governor in 2003, Bernanke preached about the looming dangers of deflation, which “contributed” (Greenspan was still the “Maestro,” the board neglected to note) to the Fed keeping interest rates at 1% for a full year after the 2003 tax cut. This helped fuel the asset bubbles in commodities and real estate that eventually blew up the financial system.

2) In a May 2007 speech, Bernanke argued that the subprime market woes would not spill over into the real economy or the financial system. He was wrong.

In its closing defense of Moore, the WSJ Editorial Board cast aspersions on the entire Federal Open Market Committee (FOMC), consisting of the members of the Fed board and the five regional Federal Reserve Banks’ presidents. It noted that the FOMC has greatly overestimated growth nearly every year from 2010 to 2016 and then underestimated it in 2017 and 2018. According to the Journal, “If you’re worried about mistaken forecasts, Mr. Moore has plenty of company.” Now there’s a ringing endorsement!

A Mad Hatter’s Tea Party

Besides the highly anticipated pronouncements from Fed Chairman Powell, the other four members of the seven-member board (there are two vacancies, one of which Trump hopes to fill with Moore), as well as presidents of the 12 Federal Reserve Banks, regularly opine on the state of the economy. They offer their individual, and often differing, views on how monetary policy might best be employed to further the Fed’s stated mandates of maximum employment, stable prices, and moderate long-term interest rates.

In recent weeks Moore has been upstaging that august body, pressing his agenda on talk radio and writing op-ed pieces before he’s even been nominated. Although his self-declared expertise is in tax cuts and supply-side economics (and seemingly unconstrained by his own shocking admission that he “will be on a steep learning curve … about how the Fed operates”), he is shamelessly attempting to coach the Fed from the bleachers. Last week he told the New York Times that the Fed should immediately cut the Fed funds rate by 50 basis points, in marked contrast to the language used by sitting board members in recent days. The ink had scarcely dried at the Times when on March 29 Larry Kudlow, Trump’s National Economic Council director, echoed Moore’s injunction to the Fed. Both men appear to be sycophants dangling on the strings of a puppeteer who knows even less than they about monetary policy and the economy. Step back a pace or two and see if you can visualize the image appearing before my eyes: a Mad Hatter’s tea party.

The Fed chairman has outsized sway in policy matters because he chairs the FOMC, which sets the Fed funds rate, as well as the monetary supply through quantitative easing (QE) or, more recently, quantitative tightening (QT). Speaking at a Fed news conference on December 19, Powell announced that the FOMC had unanimously voted to raise its benchmark rate from 2.25% to 2.50% and signaled that it expected additional rate increases in 2019. It had hiked the rate eight times since the normalization process began in December 2015. Little over a month later, on January 30, Powell abruptly reversed his policy stance. “The case for raising rates has weakened somewhat,” he said meekly. What changed his mind? Was it the darkening economic outlook, or possibly a “Trumping” he had taken from the president? After the Fed raised its benchmark interest rate in December, Trump fretted openly to aides that Powell could “turn me into Hoover.” Earlier Trump had lamented, “Choosing Mr. Powell for the Fed job last year was the worst mistake of my presidency.” … Or was Powell motivated by something else?

In our previous post, we quoted Anna Schwartz, who in 2009 unabashedly challenged the Fed to speak out about excesses before they threaten financial instability because: “After all, the Fed is the manager of markets.” Alan Greenspan, the master of obfuscation, equivocated on the subject in The Map and the Territory: Risk, Human Nature, and the Future of Forecasting (2013). He argued that though some academics favored an incremental defusing of a bubble through a gradual tightening of monetary policy, “such incremental policies have never appeared to have worked in the real world. We can spot bubbles as they inflate, but we are not able to forecast their complex resolution and collapse and … perhaps never will.” He characterized the policy choice as binary: If policymakers choose to lean against a forming bubble, they must accept the inevitable constraints on economic growth that such action often induces.

Powell’s Greatest Fear

I believe that what Jay Powell fears is the same game changer that dogs the president, who has staked his political future on a rising market and a robust economy. Like the emperor who has no clothes, Powell surely realizes that the pretense of knowledge is a charade that will eventually be exposed. Inadvertently bursting the Fed-driven, decade-old, and growing bubble in risk assets is certainly this Fed chairman’s worst nightmare, no doubt manifesting itself in the ghost of Anna Schwartz.

An economic castle built on the sand of inflated asset prices will collapse more spectacularly than one could ever imagine, an outcome common to complex systems. Such is the hand Powell has been dealt. There’s no easy resolution to the excesses that have built up in the economy and the markets. The Fed chairman’s recent reversal of course suggests that he’s at least somewhat aware of how close the U.S. market is to snowballing out of control—and how helpless the Fed will be to prevent such a disaster when the moment of truth arrives.

The record of the Fed managing the economy or markets, particularly at inflection points, is hardly cause for optimism. And the Fed is downright abysmal when it comes to successfully deflating asset bubbles. Returning to Mr. Moore, his ineptitude is a double negative. The time for removing the interventions that impeded organic, sustainable solutions has long since passed, and thus the road to normalcy will be rocky indeed.

[1] From F. A. Hayek’s Nobel acceptance speech: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

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