Federal Reserve Chairman Jay Powell seems like a nice enough guy. And unlike his predecessors, he seems like a pretty straight shooter. But sometimes the plain English coming from his mouth is enough to scare the bejeesus out of you.<\/p>\n
Alan Greenspan was known for developing what is now known as \u201cFedspeak,\u201d the art of making long, wordy statements that sounded good when you heard them but really meant nothing and could be interpreted to mean anything any listener wanted to hear. The intention was to obfuscate what the Fed was actually doing. As long as stock markets kept climbing, which they did for most of Greenspan\u2019s tenure, everyone seemed to overlook it.<\/p>\n
Ben Bernanke and Janet Yellen continued the tradition and, although they weren\u2019t quite as good at it as Greenspan, they still managed to say a whole bunch of nothing. Every Fed press conference and every round of testimony before Congress was met with gobbledygook. Trying to figure out just what the Fed was doing was nearly impossible.<\/p>\n
Powell, by comparison, is much easier to understand. He\u2019s a lawyer, not an economist, and so his language is much more straightforward. He also has been pretty explicit about what the Fed is doing and what it plans to do, which is a refreshing change. But sometimes when he speaks you realize that neither he nor the Fed understand the forces they\u2019re dealing with, which is absolutely terrifying.<\/p>\n
Powell\u2019s recent comments before Congress on inflation are particularly worrying. It\u2019s important to distinguish once again between the traditional economic understanding of inflation and the modern usage of the word.<\/p>\n
Traditionally, economics considered inflation to be an increase in the money supply, the effect of which, all other things being equal, was an increase in the general price level. Today effect has been confused with cause, so that the economics profession today considers inflation to be a rise in prices.<\/p>\n
That\u2019s why Powell was able to say with a straight face last week that increases in the money supply had nothing to do with inflation. Per Powell, \u201cthere was a time when monetary aggregates were important determinants of inflation and that has not been the case for a long time.\u201d He went on to add, \u201cthe correlation between movement in different aggregates, you mentioned M2, and inflation is just very, very low.\u201d<\/p>\n