I can’t claim to be an expert on the Fed. But what the heck, everybody's clever nowadays. Here are some random thoughts by an outsider on the Powell speech.

And the first thing that springs to mind is how institutions (central banks) so obsessed with being “forward looking”…

…can come across as being incredibly backward looking. It feels like the conclusions are certainly appropriate for the decade post-GFC, but whether appropriate for the decade ahead is harder to judge. So, there is a sense of driving with the rear-view mirror here…

…this doesn’t make the conclusions wrong. Only a danger it could be found wanting soon—a common theme in monetary history, of course, per Goodhart’s Law or Lucas Critique; structural changes or expectations render past relations flimsy...

Chasing one's tail is not a good monetary strategy. The review background, per Powell, is: (i) decline in productivity; (ii) falling yields (global); (iii) record pre-COVID labour market performance; with (iv) limited inflation and expectations—is the Phillips Curve dead?

The Process involved Fed Listens; a Research Conference; a series of internal meetings and analytical work. This led to a revised statement of longer-run goals and the Monetary Policy Strategy (MPS).

Before discussing MPS outcomes, one thing that is striking is the limited discussion of the international role of USD and the global context. To be sure, there was a session at the Research Conference on the “Global Dimension of MP” in paper by Obsteld and eminent discussants.

But the exchange of views with non-residents and the international community via multilateral institutions appears to have been limited. Perhaps not. But the global backdrop (and implicitly global coordination) seems to be pivotal to understanding past and future Fed policy.

To wit, one of the most important aspects of the past decade of “prosperity” and labour market strength in the US was the stickiness of the US current account deficit (and provision of dollars globally).

The external deficit barely touched 3% of GDP despite USD strength, most of this was absorbed by China; meanwhile, non-resident inflows to US Treasuries fell sharply (with many of inflows being hidden domestic purchases via external corporate tax structures.)

This has turned on its head the pre-GFC experience (wide external deficit w/ non-resident purchases of Treasuries). Some, of course, is due to the “shale.” Still US private saving rate remained high despite apparently cyclical strength and, since 2016, growing fiscal deficits.

And whereas a decade ago it was impossible to ponder monetary policy without the weighing of non-residents on the long end of the yield curve, today’s relative absence goes largely unremarked. Yet the long end has been carried by some gravity or other towards the ground.

At the same time, the oil shock in 2014/15 and subsequent impact on headline inflation and coincident the manufacturing “recession” in the US was rooted in global forces—a China investment slowdown coupled with the structural shale story in the US.

This means, perhaps more than ever post-1945, that Fed policy was reacting predominantly to global conditions—if not, Fed policy would drive negative global outcomes to the detriment of the US economy.

Put another way, we have moved over a decade from Bretton-Woods 2 to a US-China monetary system, where China absorbs and distributed dollars on current account across the system; there was a general USD shortage, and plays a near-equal role at the margin in pricing commodities.

At one level, this is just an “external” expression of the internal puzzles highlighted in the Powell Speech, of course. But this matters. And perhaps they deserve more consideration—certainly as much as the Phillips Curve puzzle (in my view).

And there is a read-across to the ongoing ECB review. The ECB consistently asks for feedback from “people living in the euro area.” https://twitter.com/ecb/status/1296009246111404033?s=20

But the ECB’s past and prospective policy sits within a global system impacting people elsewhere. As such, non-resident views ought to be welcome.

Naturally, the ultimate constituency is still “domestic” (whatever that means). But concern for the external dimension of domestic policy is important.

And this is embedded in the IMF’s Article IV (since Second Amendment), whereby the stability of the global system is underpinned by domestic policies that deliver macro-financial stability. And it’s also symbiotic.

Which is to say the global dimension both matters and has legal grounding. Alternatively just as Solow joked of Friedman he could only (obsessively) think of everything in terms of monetary aggregates, MP disconnected from external considerations is apt to miss the big picture…

Back to Powell’s speech. What are the overall goals? Well, the 2 percent inflation. Forward looking, expectations… maximum employment. Broken record. Elusive Phillips Curve. Yep. But if inflation outcomes and expectations remain limp then policy space would be constrained.

And so, the Fed will target average inflation without being tied to “particular mathematical formula that defines the average.” Although “to an extent, these revisions reflect the way we have been conducting policy in recent years…” New features are not very clear...

Meet the new boss, the same as the old boss.

Where do we end up? Does it pass the "Oxford undergraduate PPE test"? Was there anything in the speech that could not have been knocked up by an enthusiastic undergraduate...

armed with nothing but a four pack of Red Bull, a packet of cigarettes, and a 9am deadline? Not really. Perhaps the process of achieving consensus at the Board matters.

That said, four things stand out. First, new tools available appear limited, beyond the hope that “expectations” will be influenced to keep real rates at the lower bound negative.

Second, there is no explanation of when the inflation averaging begins—when does recent history begin? 10 years ago? 1 year ago?

Third, there is not a single reference to fiscal policy at all—perhaps politically reasonable, but not really economically… beyond the global considerations above, is domestic policy coordination dead? OK, the Fed perhaps can’t lead on that. But it matters. Big time.

Fourth, there's no recognition that the next decade will look very different from the past, in the same way that the past decade was not a carbon copy of the noughties.

Naturally, predicting the structural changes that will define the post-COVID decade is difficult and not something a central bank should vocally champion…

But policy needs to be embedded in a shifting structural narrative. The possibility that, even with a vaccine, COVID-19 remains lingering concern and that there will be structural changes in spending and production arrangements is not unreasonable.

But to punt on this being unambiguously deflationary is not obvious. And the deglobalization and re-shoring of production as a result, as well as associated fiscal measures, means an average inflation target might turn out to be the right policy at the wrong time.

If inflation picks up for 3 years for fundamental structural adjustments, what has happened to average inflation and does that mean the Fed should tighten policy as a result? I can’t be sure they should. And I can’t tell on the basis of today’s announcement if they would.

Anyway, what do I know. I probably couldn't find the United States on a map. END.