What does Jerome Powell, chair of the Federal
Reserve, understand that Vladimir Putin doesn’t?
OK, I know that may
sound like a trick question, or a desperate effort to offer a counterintuitive
take on recent events. We may say that the Fed has gone to war against
inflation, but that’s just a metaphor. Russia’s war on Ukraine, unfortunately,
is all too real, leading to tens of thousands of deaths among both soldiers and
civilians.
اضافة اعلان
Yet the Fed and the
Putin regime have this in common: Both took major policy actions this week. The
Fed raised interest rates in an attempt to curb inflation. Putin announced a
partial mobilization in an attempt to rescue his failed invasion. Both actions
will inflict pain.
One important
difference, however — aside from the fact that Powell is not, as far as I know,
a war criminal — is that the Fed is acting to maintain its credibility, while
Putin seems determined to squander whatever credibility he might still have.
About the Fed: I’m
worried about the effects of rate hikes. There is a serious risk that the Fed’s
actions will push America and the world into a gratuitously severe recession,
especially because it isn’t just the Fed — central banks are raising rates
around the world, and there could all too easily be a sort of destructive
synergy from this worldwide monetary tightening.
Yet if I were in
Powell’s shoes, I would probably have done the same thing. For the Fed is
anxious to preserve its credibility on inflation.
Notice that I said
“preserve.” The Fed — like yours truly — failed to predict the 2021-22
inflation surge. But neither financial markets nor the public lost faith that
inflation would, in fact, come down in the fairly near future.
That’s an important
asset. Subdued inflation expectations are the best reason to believe that the
Fed can engineer a relatively soft landing — an economic slowdown for sure,
maybe a recession, but not the kind of sustained era of extremely high
unemployment that it took to end the inflation of the 1970s.
And the Fed is acting to preserve this asset, trying
to bring current inflation down soon enough that the public retains its faith
in low future inflation. I don’t like it. I’ll be calling for a monetary pivot
as soon as we have clear evidence that inflation is, in fact, coming down. But
the Powell Fed is, I’m afraid, right to believe that retaining credibility is
important.
Subdued inflation expectations are the best reason to believe that the Fed can engineer a relatively soft landing — an economic slowdown for sure, maybe a recession, but not the kind of sustained era of extremely high unemployment that it took to end the inflation of the 1970s.
Putin obviously
doesn’t have similar concerns.
His Wednesday
speech was full of apocalyptic rhetoric, portraying Russia as a nation under
attack by the whole West. But he didn’t announce the kind of full-scale mobilization
that rhetoric would seem to imply. Instead, he announced a series of
half-measures that defense experts doubt will do much to change Russia’s
downward military trajectory. I have no reason to question their judgment.
What struck me,
however, was that the new policies amount, in effect, to a betrayal of Russians
who believed Putin’s past promises. Notably, contract soldiers — people who
volunteered to serve for a limited time — have suddenly found themselves stuck
in service for the indefinite future. This may shore up Russian numbers for the
next few months; but who, in the future, will be foolish enough to volunteer
for Putin’s army?
Putin’s clumsy
efforts at economic warfare are, in a way, creating similar credibility issues.
Russia has largely cut off the flow of natural gas to Europe, hoping to bully
Western democracies into stopping their military and economic aid to Ukraine.
He is succeeding in creating a lot of economic pain; energy prices have soared,
and a nasty European recession seems highly likely.
Yet the West isn’t
going to abandon Ukraine, especially given Ukrainian success on the
battlefield. So Putin’s attempted economic bullying, like his partial
mobilization, probably won’t change the course of the war. What it’s doing,
instead, is showing how dangerous it is to do business with an erratic,
authoritarian regime. This means that even if and when the Ukraine war ends,
Russia’s trade relations won’t return to normal: As long as Putin or someone
like him remains in power, Europe will never again allow itself to become so
reliant on Russian energy.
In short, Putin is
engaged in what we might call a bonfire of the credibilities — his desperate
short-run efforts to rescue his war of aggression are undermining Russia’s
future, by making it clear that he can’t be trusted. Looking forward, Russian
citizens won’t volunteer to serve in the military, lest they end up trapped in
a kill zone; European companies won’t sign contracts with Russian suppliers,
lest they find their businesses stranded by economic blackmail.
Credibility can
seem squishy, and it can be abused as a rationale for objectively bad policies.
And being too rigid about obeying rules that have been overtaken by events can
do a lot of damage.
But maintaining
credibility — demonstrating that you will, in fact, honor your promises within
reason — is nonetheless important. Putin apparently doesn’t get that, and his
contempt for past promises may be his downfall.
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