Jerome Powell has taken a lot of abuse over the past few years. The Federal Reserve chairman was blamed for mischaracterizing the rise of inflation as transitory in 2021, a move that led him to keep interest rates near-zero well into the post-COVID recovery. And even after Powell admitted he had miscalculated inflations trajectory, leading him to walk back that transitory line and turn to interest rate hikes to fight consumer price increases in March of last year, he couldnt get the critics off his back. A new group emerged who argued the Fed chair was being too aggressive with his rate hikes and could end up sending the economy into recession. But now, Jefferies chief market strategist David Zervoswho has stood by Powell over the past 18 monthsis taking a victory lap amid the economys resilience, branding the Feds critics Jay-haters and Armageddonistas. Hes even composed a Dear Jay apology letter template for their convenience.
Criticism of Powell was especially pointed earlier this year after regional bank instability, headlined by the collapse of both Silicon Valley Bank and Signature Bank in March. University of Pennsylvania Professor Jeremy Siegel, along with Yales Jeffrey Sonnenfeld and Steven Tian, argued in a March Fortune op-ed that shrapnel from the Feds rate hikes killed SVB and may send the economy into recession in the process.
But despite the consistent warning from Fed critics, the recession hasnt comeat least just yetand inflation is now down more than 4 percentage points from its June 2022 year-over-year peak of 9.1%, while the unemployment rate remains at a 54-year low. Zervos saw this coming back in April, when he published a market commentary titled Armageddon Fail ripping consistent recession predictions from economists and what he described as discredited and vitriolic critiques of the Feds rate hikes.
The former advisor to the Federal Reserve Board, who boasts decades of Wall Street experience, says he believes the central banks rate hikes have had their desired effect, lowering inflation without sparking a recession. Powell has maintained the Feds credibility, kept the dollar strong, and valiantly fought inflation even in the face of potential economic pain, according to Zervos, who called the strategy tough love.
Cue the victory lap.
Beating up on haters more generally is still one of my favorite pastimes, he wrote in a Monday note. And when I look at the bigger macro picture, away from the debate on regional bank stresses, those who have been relentlessly criticizing Fed actions for the last 18 months are in desperate need of a fresh beatdown.
The critics
When it comes to Powell critics, the list is long and full of household names, including the billionaire investor and CEO of Starwood Capital Group Barry Sternlicht, who told Fortune last October that Powell and his merry band of lunatics were leading the economy towards catastrophe as they raised rates in the face of fading GDP growth.
I think maybe theyre just not up for the task, he said of the current slate of Fed officials. Maybe theyre not smart enough to understand the impact of their actions. This is kind of like, and Im not kidding here, the inmates running the asylum.
Howard Universitys William Spriggs also admonished Powells aggressive inflation-fighting stance, comparing the economy to a plane with failing engines that rate hikes threatened to turn off entirely last August.
I think if they come to their senses [and pause rate hikes] before September, we might be able to eke out having a recession, but it would be hard because things are already slowing down in the labor market, Spriggs told Fortune.
On Monday, Zervos argued there wasnt much new to say to these critics on the macro front given inflations downward trend and the economys resilience, unless he wanted to continue his victory lap. Instead, the strategist offered an apology letter template in his sarcastic commentary.
Today I thought I would remind everyone of just how deluded those critics have been by publishing an apology letter template for them to utilize as they come to grips with their misguided ways, he wrote. I sincerely hope a few of those folks, especially the ones with the highest profiles, can employ something like this to come clean. Its time for them to make heartfelt amends with Jay.
Of course, some might argue that Zervos is celebrating too soon. A number of investment banksincluding Bank of America, Wells Fargo, Nomura, and morebelieve a recession is still coming this year. And even the Federal Reserves own staff still has a mild recession as their base case for the economy. Nick Brooks, head of economic and investment research at the private equity firm Intermediate Capital Group, also told Fortune Monday that despite recent economic resilience many of traditional recession indicators are flashing bright red.
Zervos letter highlights the age-old debate, now renascent, in economics between monetarists from the line of Milton Friedman, who promote a more laissez-faire approach to policy and believe that inflation is caused by excess growth in the money supply, and Keynesians, who are named after the British economist John Maynard Keynes, and point to labor or capacity shortages as the key driver of inflation.
Zervos, a monetarist, stands by his view that Fed Chair Powell has done the right thing by quickly raising rates since March of last year, arguing there is nothing more important than reducing the money supply to ensure price stability for the economy. And he has a request: Please feel free to forward this apology letter template to any of your friendly neighborhood Fed critics. I am sure you can find more than a few out there.
Heres that template:
Dear Jay,
I am truly sorry for doubting you since the summer of 2021. I incorrectly applied faulty Keynesian demand-side theories to rebuke your monetary policy decisions. Clearly, the post-COVID shocks that have hit the global economy came predominately from the supply side. If I had just looked more closely at the inflation experience in Europe, where labor market slack was much greater than in the US, the supply-side storyline would have been much clearer.
I am also deeply sorry for having compared you to the late Arthur Burns. You correctly saw that this adverse supply shock, which persisted much longer than initially anticipated, generated a serious risk of de-anchoring long-run inflation expectations. You then engaged in an aggressive tightening campaign to ensure that the hard work of credibility rebuilding over the last 40-plus years by the Federal Reserve was not undermined. The tough love of slowing aggregate demand was the only choice in response to this supply shock. And unlike Arthur Burns (or his predecessor Bill Martin), you did not acquiesce to partisan calls to pull back on the tightening efforts late last year. In the end, your policies made sure that the ghost of Burns never returned to those hallowed halls at 20th and Constitution Ave. And there is no doubt in my mind that Paul Volcker is currently looking down from his perch at the pinnacle of central bank heaven with an approving smile.
You should also be extremely proud that your policy efforts have kept long-run inflation expectations in check, the dollar strong, and term premiums low throughout this entire unpleasant inflationary experience. It now even appears that short-run inflation expectations, after initially spiking, have come back to target levels. Every measure of Fed credibility has remained fully intact over the last 18 months as you fought back against this supply side storm that brought us to a peak of 9% inflation. All I can say is, bravo, Jay!!
After realizing my misguided economic ways, I wanted to share with you that I will be spending the next few years retooling. It certainly appears that I have underestimated the important neoclassical/supply-side work of economists such as Lucas, Sargent, Wallace, and so many other freshwater macro theorists. Sadly, I got hung up on old-school Keynesian demand-side IS/LM-based theories that coveted things like Halls consumption function and the Phillips curve. These concepts are clearly failures. My economics training requires a complete pivot now. Thank you for helping me see the light.
I sincerely hope you can forgive me. I was completely wrong. Your efforts were truly Herculean during this difficult period. Thank you for your tireless efforts to keep long-run inflation expectations anchored. There is nothing more important for creating maximum sustainable long-run growth potential than low, stable, and anchored long-run inflation expectations. The American people are deeply indebted to you for keeping at it during this epic inflation battle.
With the deepest of both regret and sincerity,
[Insert a Jay-hater name here.]
