Markets: Really? But we have been conditioned for years to expect strong support from the Fed in the form of rates and liquidity. And this is where you seem to have signaled we are starting to go back to, especially now that inflation is no longer a problem. Just look at your own projections!
Powell: Wait, wait, wait. It’s way too early to declare victory over inflation. Indeed, I explicitly said yesterday that we would need “substantially more evidence” before we would be comfortable that the inflation problem is behind us. I also said that our inflation forecasts have repeatedly proven wrong.
Markets: But actual and forward indicators of inflation uniformly point down, and not just in the U.S.
Powell: It is one thing for inflation to come down. It is another thing for it to return to our 2% target. The inflation problem is not behind us. Then there is weakening growth outlook. Surely that matters for earnings and stock prices.
Markets: Oh, we did hear you say something about that. But you have also, at least implicitly, repeatedly reinforced the market consensus that a recession, were it to materialize, would be short and shallow. That means we should just “look through it.”
Powell: I just wish politicians would look through it, too. I don’t think they like it when I predict below-trend growth and higher unemployment. They think the Fed can somehow avoid this.
Markets: Well, we sympathize with them.
Powell: What do you mean? Surely you know that overcoming the inflation threat is crucial for high, durable and inclusive growth that is also consistent with the battle against worrisome climate change.
Markets: Yes, but wouldn’t we be in a better place on most counts had the Fed not badly and protractedly mischaracterized inflation as transitory; had the Fed tightened policy faster when it finally “retired” “transitory” from its vocabulary; and had it not been therefore forced into a record four consecutive 75-basis-point rate increases?
Powell: Sorry. It is almost time for our blackout period ahead of our December policy meeting.
Mohamed A. El-Erian is a Bloomberg Opinion columnist. A former chief executive officer of Pimco, he is president of Queens’ College, Cambridge; chief economic adviser at Allianz SE; and chair of Gramercy Fund Management. He is author of The Only Game in Town.
This article was provided by Bloomberg News.