Sebastian Mallaby: uncertainty

Transcript context

…How is Jerome Powell doing? I think Jerome Powell is about to face a huge test as he tightens rates, starting next month. History will, of course, tell us whether he manages to stabilize inflation without causing a major recession. That’ll determine how he’s going to go down. Here’s how I would frame it, having acknowledged that it’s a risky thing to stick my neck out here, but here’s how I would frame it. I would say that COVID was this humongous shock to both supply and demand. Unprecedented. The Fed responded in an unprecedented way with a stimulus, which, as you know, was multiples of what was delivered in 2008. That did get us through the COVID downturn with remarkably little economic privations for Americans. That is an amazing achievement. COVID was tough in many ways in health terms, in mental health terms, but actually, balance sheets of households did very well. Now, that is a huge achievement. You couldn’t achieve that without accepting some risks that you would overshoot. How do you target the right amount of stimulus when you are in that completely uncharted water, and you don’t even understand the trajectory of the pandemic, let alone the pandemic’s effect on the real economy? They took a risk. They may have overshot and overstimulated it. We’ll see if they exit without causing a big recession. I think they will. I think that history will judge Jerome Powell to have been a very brave risk-taker and actually a success, but I have to admit that I could be wrong. Do you think the Fed was excessively intimidated by the fiscal authority? There’s a joint effort going on, and the monetary authority, fiscal authority — they often want different things. Do you think it’s the case the Fed exactly understood the calculus, or was shocked that inflation came in at almost 7 percent? Or even an alternative is, they secretly welcomed it being that high, or they would’ve preferred it only had been at 4 percent, but the fiscal authority had more power? What’s your mental model of what went on in the government as a whole? There was overshooting, but how does the Fed fit into your exact story?…

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