Federal Reserve Chair Jerome Powell will testify in front of Congress on Tuesday and Wednesday this week. Politicians will use the sessions to pressure the Central Bank to adopt their party’s preferred monetary policy and as an excuse to bring up their favorite economic talking points. But these hearings also serve a larger purpose — to frame a recession as if it is possible to avoid.
Like everything in politics, events like this are all about optics. Republicans will call on the Fed to stay the course and fight “Bidenflation.” Democrats will use the meetings to signal how much they oppose unemployment and will also call on Powell to condemn the GOP for using the debt ceiling to force spending negotiations.
But Powell is also there to play the optics game. There are two fronts that he will need to navigate. First, he must make sure to not say anything of substance. Every word the Fed Chair utters or writes is poured over by investors and money managers worldwide. One slip-up or unexpected remark can send global markets spiraling.
But silence isn’t an option. The Central Bank needs to keep up an appearance of transparency. The solution, made famous by Alan Greenspan and adopted by every Fed Chair since, is to use so much jargon that one can appear to offer detailed answers while saying nothing at all—an exercise called Fedspeak.
But the other way Powell is sure to mislead the American public this week, with help from politicians of both parties, is by giving the appearance that, however unlikely, it is possible to avoid a recession.
It is not.
When the Fed slashed interest rates to rock bottom in 2020 to prop up an economy gutted by government-imposed shutdowns, the Central Bank sent a false signal to investors and entrepreneurs.
As a result, new lines of production were started that investors mistakenly believed were valued by the end consumer. These new lines of production bid resources away from other ventures that had been producing things consumers actually wanted.
So our problem is not an economy running too hot or too cold. It’s an economy that has run off course. And economies that run off course need to be corrected. Recessions are that correction.
Talking about the speed of the economy or the relationship between unemployment and inflation obscures this basic underlying reality. But it’s a reality that the Fed must deny if it wants to stick around. That’s Powell’s main job this week.
