The Powell Fed Credibility

Summary

• The credibility of the current Federal Reserve leadership has now been questioned by Mohamed El-Erian publicly.
• If the issue of credibility reaches a publication like the Financial Times and is presented by a prominent analyst, one should be concerned.
• Jerome Powell, Chairman of the Federal Reserve System, tried to address his audience last Friday at the Jackson Hole Conference and apparently has come up short.
• If the Federal Reserve continues to lag in policy response and continues to lag in credibility, investors must be cautious in building their investment strategy.

Dilok Klaisataporn

Mohamed El-Erian writes in the Tuesday, Financial Times,

"This may well be the least credible Fed in the markets' estimation, since the 1970s."

Mr. El-Erian does not mention that the current Federal Reserve is led by Chairman Jerome Powell.

Mr. El-Erian does not mention that the Federal Reserve chairman in the 1970s was Arthur Burns, who was the chairman from February 1, 1970, to January 31, 1978.

Mr. El-Erian leaves one with the feeling that he doesn't think much of Mr. Burns as the leader of the Federal Reserve in the 1970s.

(For a relatively similar take on Mr. Burns, one can look at the recent op-ed piece in the Wall Street Journal written by Thomas Sargent and William Silber.)

Mr. El-Erian also adds another economist, Larry Summers, former U.S. Treasury Secretary, to the list of "experts" that are not particularly taken by the way Mr. Powell has been running the Fed.

The concern over the leadership of the Federal Reserve is becoming more and more vocal. This is very concerning, given where we all are in terms of the condition of the U.S. economy, the world economy, and the leaders that are providing the guidance for getting through the current "mess" as well as possible.

Mr. Powell's Speech

Mr. El-Erian writes that Mr. Powell's speech at Jackson Hole just addressed the concerns of the present.

Mr. Powell in his very short speech (nine minutes) attempted to deal with what the Federal Reserve is focused on "right now." The Federal Reserve is focused on inflation and will continue to focus on inflation until it gets inflation under control.

Last year, Mr. Powell said that inflation was "transitory" and would go away soon.

Mr. El-Erian steps right up and says that no mention is made of the fact that last year's forecast was so bad: it involved "inadequate analysis, bad forecasts, poor communication, and belated policy responses."

He goes on to say that, as a consequence, the Fed is lagging behind where it should be with no real notice of this fact and no plan to catch up.

Furthermore, the markets have not responded to what the Fed has already done and has taken on a path of its own.

Therefore, Mr. Powell and the Fed have created a situation in which uncertainty has risen over time, not lessened.

A final point that Mr. El-Erian mentions several times is that Mr. Powell:

"is yet to take responsibility for the last 18 months of Fed errors, including the mis-characterization of economic and policy issues in last year's speech. He is also yet to provide a pathway for the much-needed revisions to the policy framework."

In other words, along with everything else the Fed has lost its policy narrative.

Markets are confused.

The Dilemma

In my estimation, the United States faces a very, very disrupted economy.

Markets, companies, and individuals are dealing with serious conditions of disequilibrium, and they are faced with a central bank that is behind the curve in terms of where it should be in the inflation battle and a federal government that is doing little more than providing more programs that will only exacerbate the inflationary environment.

In this narrative, the economy's condition of disequilibrium will only grow, making the environment more uncertain, and making the use of financial instruments more fragile.

And, when analysts with the stature of Mr. El-Erian, Mr. Summers, and company, further raise the attention of the crowd to this dilemma, it only indicates that the situation is becoming more advanced.

I mean, if Mr. El-Erian is now claiming in the Financial Times that this Fed, under the leadership of Mr. Powell, has so little credibility, then others are going to be voicing the issue and the markets' concern will only grow.

This is just what the market doesn't need.

Jackson Hole

Mr. Powell used Jackson Hole to respond to his critics and help the process to move on.

His take on the situation was that he needed to stand up and say that the Fed was fighting inflation and would stick to this process.

He thought that this would be enough.

Mr. El-Erian is saying that the nine-minute speech was not enough.

Consequently, credibility is still missing.

Uncertainty has not been reduced.

And, this is where we enter the fall of 2022.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.