This week marks the end of an era.
It is Jerome “Transitory Inflation” Powell’s last Jackson Hole Economic Symposium.
President Donald J. Trump has made it clear that Powell’s time leading the central bank is coming to a close. This time next year, there will be a new clown in a gray flannel suit delivering the closing statements at Jackson Hole.
Let’s not get all teary eyed. I come to bury Powell, not to praise him.
But all the same, let’s reflect on the career of a man who presided over the biggest surge in inflation since Jimmy Carter was in the White House.
Powell was born in 1953. He started his promising career as a lawyer, then hopped over to investment banking at Dillon Read and eventually Carlyle.
Somewhere along the way, he decided steering the global economy sounded fun. After stints at the Treasury, he landed at the Fed in 2012 as a Governor. In 2018, he became Chair under Trump.
It all went downhill from there.
This feels like a lifetime ago, but when Powell started his career at the Fed no one was particularly worried about inflation. Four years after the 2008 meltdown, the fear of deflation is what kept Fed governors up at night.
Powell’s predecessors, “Helicopter” Ben Bernanke and Janet Yellen, were determined to prevent the “Japanification” of the U.S. economy – persistent low growth, stubborn deflation, and a distinct lack of animal spirits – so naturally they copied Japan’s playbook of aggressive quantitative easing and keeping interest rates pegged at zero.
Amazingly enough, policies that failed to work in Japan also failed to work in America!
Real GDP growth between 2008 and 2019 averaged an anemic 1.8%.
So, what do you do when a policy isn’t working?
You do more of it, of course!
When the COVID pandemic shut the world down in 2020, Powell went to the only play he knew. He dropped interest rates to zero and launched a quantitative easing program that put even Helicopter Ben’s to shame, inflating the Fed’s balance sheet by $5 trillion and flooding the market with liquidity.
Who could have imagined the results?
Transitory Inflation
Flooding the market with free money at a time when supplies were constrained… who could have imagined that might cause inflation!
Under Powell’s diligent care, consumer price inflation jumped from near zero to over 9%.
But don’t worry. He assured us it would be “transitory.”
I suppose if one were to take a contemplative, philosophical view, all things are transitory. In another 5 billion years, our sun will die and all life on earth will perish. Humanity and life itself is transitory.
Nonetheless, Powell resolved to fix the inflation mess he created by going on the most aggressive rate-hike spree in the history of the Fed in 2022.
That gave us a bear market, a string of regional bank failures, and a housing market that remains frozen three and a half years later.
For the life of me, I’ll never understand why President Trump gives Powell such a hard time. He should be thanking the man!
If Powell hadn’t made such a mess of things, voters enraged by the cost of groceries probably wouldn’t have booted Biden and Harris out of office.
Powell’s goodbye will be a long one. He’s not scheduled to step down until May, unless Trump finds a creative way to fire him.
But Wall Street is already speculating on Powell’s successor.
Will it be Kevin Hassett, Trump’s Director of the National Economic Council?
Or Stephen Miran, the architect of the “Mar-a-Lago Accord” to depreciate the dollar?
We’ll know soon enough.
But will it actually change anything?
No.
The incoming Fed chair may be slightly more inclined to lower rates. But as a practical matter, it will be more of the same.
We’re going to have an overconfident know-it-all in a suit attempting to command the capital markets like Canute attempted to command the tides. And like every Fed chair before them, they will make a real mess of things.
So here’s a novel idea…
Why don’t we fire all Fed governors? Or at least strip them of the power to set interest rates?
Why don’t we let the free market set the price of money?
The capitalist free market is an efficient way to set the prices of everything from onions to luxury yachts. Why not allow it to set the level of interest rates too?
I know, I know. That’s just crazy talk.
We’ll have a new Chair this time next year but the same failed policy regime with a built-in pro-inflation bias.
So, what should you do about it?
Apart from popping antidepressants, hold on to your gold. The chaos at the Fed, the ballooning deficit and fragility of the trade war… all point to a cheaper dollar ahead. Gold is the most reliable way to hedge against that risk.
We’ve been long gold in Freeport Investor since I launched the newsletter in December 2023.
We’re currently up about 65%, though I don’t consider this an “investment.”
It’s insurance.
And if you don’t already own some, it’s not too late.
To life, liberty, and the pursuit of wealth.