Mission Accomplished: Is it Too Early for the Fed to Declare Victory?
Former JPMorgan Global Chief Economist (Ph.D in Economist) and Current BrightQuery Chief Economist
Special Thanks to Carl Nenzen Loven for this Picture on Unsplash.com
Yes, it is too early to declare victory!
Still, the Federal Reserve’s jet appears to be approaching the airport with good runway visibility. The Fed’s preferred inflation measure, the core PCE deflator excluding food and energy components, saw its 12-month growth rate fall to 3.2% for November 2023. That figure was almost half its peak 5.9% growth rate recorded in March 2022. While that figure remains above the Fed’s 2.0% target growth rate, the core PCE’s 6-month annualized growth rate fell to 1.9%, below the Fed’s 2.0% inflation growth target!
Source: U.S. Bureau of Economic Analysis
Of course, Fed critics will say that the central bank targets the 12-month growth rate, not the 6-month annualized growth rate. Nonetheless, a statistical regression of the yearly core PCE growth rate against the 6-month annualized growth rate reveals that the latter growth rate explained 85% of the movements in the 12-month growth rate. Such evidence suggests that the Fed’s jet is positioning itself to land on the runway and begin preparing to roll out its “Mission Accomplished” banner.
Some of the Fed’s harshest critics will still cry foul and say --- not so fast because during Fed Chair Powell’s tenure, the Fed overshot its yearly inflation growth target by 121 basis points and should push inflation below 2.0% to compensate for previously overshooting its inflation target. That is a valid criticism until one realizes that monetary policy is a blunt instrument that, if pushed too aggressively in either direction, could lead to a super hard landing or excessive inflation!
But considering the bipartisan criticism Fed Chair Powell has received so far from both sides of the political aisle (e.g., Senator Elizabeth Warren and President Trump), we will examine Powell’s inflation track record during his tenure and compare it to other recent Fed Chairs.
Chair Powell's tenure began on Feb. 5, 2018, which prompted us to track the yearly movements in core PCE from Feb. 2019 to the present. During his first 25 months (Feb. 2019 to Feb. 2021) in office, the annual average gain in core PCE was 1.5%. That meant the Fed fell short of its 2.0% inflation target by 50 basis points. For this reason, shortly after being appointed by President Trump began openly discussing the possibility of firing or demoting the Fed Chair for not pumping enough monetary stimulus into the U.S. economy. Today, Fed critics argue that the Fed has injected too much stimulus into the economy. For his part, President Biden also appeared uncertain of Chair Powell’s performance and actively interviewed several people for the Fed Chair position before renominating Powell for a second term as Chair. Powell was sworn in for his second term on May 23, 2022.
In a remarkable turn of events, during Powell’s tenure, core PCE jumped above its inflation target growth rate and rose by an average of 4.5% from March 2021 to the present. That means that over Fed Powell’s entire tenure, inflation increased by an average of 3.2% or 1.2% above the Fed’s 2.0% inflation growth target!
Source: U.S. Bureau of Economic Analysis and the Federal Reserve
How Does Powell Stack Up Against Previous Fed Chairs?
Although supporters of Chair Powell will say he did an excellent job given the pandemic and geopolitical developments encountered during his tenure, his detractors will argue the Fed has an inflation mandate of 2.0% that needs to be met regardless of what else is going on! We leave it to the reader to decide whether forces beyond the Fed’s control (e.g., a global pandemic or a war) should give the Fed some flexibility when striving to achieve its inflation target.
However, assuming the 2.0% inflation mandate is sacrosanct, we will use this criterion to rank the prior seven Fed Chairs. The results reveal that Fed Chair Powell generated the fourth-lowest average core PCE yearly figures of the last seven Fed Chairs! Janet Yellen appears to have won the trophy by averaging a core PCE reading of 1.49% during her tenure!
Source: U.S. Bureau of Economic Analysis and the Federal Reserve
However, critics of Janet Yellen argue that the top performer will be a Fed Chair that kept inflation strictly at or closest to its 2.0% inflation target. We say this because, during Powell’s early tenure, he was criticized as the U.S. economy averaged a core PCE that was 50 basis points below the Fed’s average annual inflation target. However, most people should realize that in a nominal $27.6 trillion economy, generating an inflation rate of precisely 2.0% per year when there are so many variables outside the control of the Federal Reserve is a challenging feat!
Yet, using this standard, the evidence shows that Ben Bernanke and Alan Greenspan are roughly tied for the best performances as Fed Chairs, with the former overshooting the target by 36 basis points. In comparison, Bernanke came in below the target by 36 basis points. Janet Yellen came in third with a core PCE average reading of 50 basis points below the Fed’s 2.0% inflation target. Powell was in fourth place by overshooting the Fed’s inflation target by 121 basis points.
Interestingly, Paul Volcker, who gets lots of credit for his inflation-fighting credentials, averaged a core PCE figure that exceeded the Fed’s benchmark target by 327 basis points or more than twice Chair Powell’s overshooting margin! Arthur Burns, often described as a Fed Chair who failed miserably to control inflation, exceeded the 2.0% target by 381 basis points. Still, Burn’s disappointing performance was exceeded by G.W. Miller during his short tenure, who surpassed the Fed’s inflation target by a whopping 521 basis points!
Source: U.S. Bureau of Economic Analysis and the Federal Reserve
Summary and Concluding Thoughts
The 6-month annualized growth rate drop in the core PCE inflation metric to below 2.0% is a significant step toward reaching the Fed’s inflation target. Nonetheless, Fed critics will say that achieving this growth rate after the Fed under Powell’s tutelage has exceeded its annual growth target by 1.2% means little. However, suppose Powell manages to lower the average annual growth rate of core PCE closer to its 2.0% target over his entire tenure but pushes the U.S. economy into a severe recession. Will his critics credit him for bringing inflation down, or will they vilify him for causing a recession? I will leave it to the reader to decide whether the Fed should bring inflation down to 2.0% on a 12-month basis or strive to achieve an average 2.0% growth rate over Powell’s entire tenure.
Interestingly, despite all the harsh bipartisan criticism that Chair Powell has received, the core PCE growth rate came in right in the middle during his tenure compared to the last seven Fed Chairs running the Federal Reserve.
Finally, we would be surprised if those Fed critics who say they value the lowest possible inflation rate as the most critical responsibility of the Fed will be ready to give Janet Yellen credit for presiding over the lowest inflation readings of any of the past seven Fed Chairs. In contrast, for those who argue that coming as close to meeting the Fed’s 2.0% inflation target is of utmost importance even in a burgeoning $27.6 trillion economy, we would also be surprised if those critics would be willing to lavish praise on Ben Bernanke and Alan Greenspan for coming closest to a 2.0% inflation growth rate during their tenures!