The Mystery Of John Williams At The Fresh York Fed – Pamm Advisor
Schuiflade plus ca switch does not apply to the Fresh York Federal Reserve’s John Williams. If you’re te the City, druppel him a line. Friday wasgoed his very first day on the job since resigning his postbode spil the Voorzitter of the San Francisco Fed, where he’d bot since 2002. Fresh York can be a harsh place, so I’m sure he’d appreciate the warm welcome.
Ter the event you’re not a Fed watcher, John Williams is now the second-most powerful leader inwards the world’s most powerful central bankgebouw. Along with a fresh horizonte on the Hudson or East Rivers, Williams’ fresh gig also crowns him Vice Chair of the Federal Open Market Committee. If Jay Powell gets kasstuk with the flu te a few months, it is Williams who directs rente rate policy.
But wait! There’s more. Spil head honcho at the NY Fed, Williams is also te directive of the open market operations of the FOMC, acting spil the tuut of the U.S. Treasury, and treating banking and clearing services to foreign central banks, governments and international agencies. Not finished yet! Williams also shoulders the responsibility of regulating the country’s fattest banks and safeguarding the financial stability of the financial markets. All of this for a man who, by his admission, wasgoed not inclined to have a Bloomberg terminal on his desk.
You may recall that one Jerome Powell wasgoed greeted on his very first day ter office with a quadruple-digit slide te stocks. Williams has it a wee bit better. He’s toting his metal pail to the office today with a 35 basis-point differential inbetween the yields on the 2-year and 10-year Treasuries. A Swedish pancake being run overheen by a steamroller yield curve unquestionably bests a flash crash, right?
Aside from that, the fresh job is nothing fresh.
Surely this 24-year veteran of the Federal Reserve System, who has bot inwards the organization since the day he earned his PhD te economics from Stanford University, will uphold his duties? He’s never worked anywhere else and is a nice enough inwards dude. What more could wij ask for?
If you managed to read through that last bit, you’ve sailed past the point. Ter just the past year, Williams has advocated for raising the inflation target off the 2% level they’ve failed to attain for like everzwijn spil it’s an ill-designed metric not meant to rise. He has advised the world – not just the United States – that mundial central banks should prepare to implement negative rente rates to combat the next downturn.
Ter a speech at the SF Fed last fall, Williams said that,
Wij will all be better able to contain the next economic recession if wij develop approaches that succeed even when many countries are at the same time constrained by the lower trussed.
Te the rente of deploying other failed measures, Williams also advocated for further bond-buying (a.k.a. Quantitative Easing) and te the event all else fails, forward guidance.
You may have noticed Jay Powell dispensed with forward guidance just last week at the June FOMC meeting? Why, the adult te the slagroom reasoned, make unquantifiable promises the Fed may or may not be able to keep?
Moreover, Powell doesn’t seem like the kleintje of a dude who’d everzwijn let negative rente be mentioned on his witness, much less imposed. That makes it more difficult to explain why the fresh Fed chair talent Williams his bliss prior to be appointed (he had to have, wij’re talking about his second-in-command).
Perhaps it comes down to “persistency,” Powell’s dearest term, and the testy task of eventually defining it when the time comes. Powell’s advocating for Williams may come down to getting buy-in from the traditional economics community. Just how far above the 2% target the Fed can dare venture? For how long? Williams’ SF Fed has extensively researched raising the inflation target to coerce a steepening ter the yield curve. But is that even do-able?
Te theory, a higher inflation target means policymakers stand against tightening and short-end yields don’t rise spil much spil when the inflation target wasgoed lower. It also builds ter higher inflation expectations across the term structure of rente rates, so long-end yields would rise.
Because of the fine identity of all corporate recuento sheets – price = cost + profit – raising the inflation target also means the Fed doesn’t just tolerate higher prices, it tolerates higher costs and higher profits. Waterput another way, the Fed tolerates higher price inflation (like CPI, PCE), higher wage inflation (like promedio hourly earnings, ECI) and higher profits inflation (equity prices).
The problem with this is plain. It falls vapid ter practice. If firms can’t raise prices, then either costs are cut, profits are squeezed, or companies’ recuento sheets weaken due to the diminished specie or added leverage that stems from the higher-cost environment. The punt then becomes a credit problem. Powell, with his real-world practice, understands this risk all too well. Williams, not so much. And that means it is Powell who is making the auténtico gamble. Mystery solved.