Jerome Powell *CyberMonday* Speech & Q&A

Key Concepts

• Bank of Englandification of the Fed: A thesis suggesting a shift of power within the Federal Reserve away from the Chair to other members.
• Jerome Powell's (JPAL) communication strategy: The observed pattern of Powell's statements influencing market expectations for interest rate changes.
• George Shultz's legacy: Emphasis on free markets, pragmatic problem-solving, integrity, and public service.
• Wage and Price Controls: Historical government interventions in the economy, largely opposed by Shultz and free-market advocates.
• Closing of the Gold Window: The US decision in 1971 to end the direct convertibility of dollars into gold, leading to floating exchange rates.
• Stagflation: A period of high inflation and high unemployment, a major economic challenge in the 1970s.
• Monetary Policy Discipline: The importance of controlling the money supply to manage inflation.
• Hoover Institution: A think tank where George Shultz was a prominent figure and where the discussed event took place.
• "The Great Convenor": A descriptor for George Shultz, highlighting his ability to bring diverse groups together to discuss complex issues.
• Pragmatism and Long Game: Shultz's approach to policy, involving patience, strategic maneuvering, and a focus on long-term goals.

Summary of Jerome Powell's Remarks and Discussion on George Shultz

This YouTube video transcript discusses Jerome Powell's recent speech at the Hoover Institution, framed within the context of a potential shift in the Federal Reserve's power structure and a broader discussion of economic principles exemplified by the late George Shultz.

Powell's Speech and Market Expectations

The initial segment of the transcript focuses on the market's reaction to Jerome Powell's (JPAL) recent statements regarding interest rate cuts. The speaker notes a significant shift in market sentiment, with expectations for a rate cut fluctuating dramatically following Powell's comments in late October and subsequent remarks from other Fed officials like Waller and Daily. At the time of the speech, futures markets indicated an 87.6% chance of a rate cut.

Powell's speech itself was a blackout event, and the speaker anticipated little direct monetary policy commentary. The event was primarily an honorarium for George Shultz, featuring a panel with Michael Boskin, Condoleezza Rice, and Peter Robinson moderating.

The "Bank of Englandification" Thesis

A key theoretical point raised is the "Bank of Englandification of the Fed," a thesis popularized by TS Lombard. This theory suggests that Powell might be intentionally diminishing the power of the Fed Chair before a new appointee takes over. The speaker speculates that Powell's earlier cautious remarks about rate cuts, which were later contradicted by other Fed members, could be part of a strategy to "water down the power of that chair seat" and potentially discredit or limit the influence of a future Fed chair, possibly Kevin Hassett, who is speculated to be Donald Trump's choice.

George Shultz: A Legacy of Free Markets and Pragmatism

The bulk of the transcript is dedicated to a discussion of George Shultz's career and principles, highlighting his influence on economic thought and policy.

Early Career and Labor Economics:

• Shultz began his career as a labor economist, earning his doctorate from MIT.
• He taught at MIT and later became dean of the University of Chicago's business school.
• In the mid-20th century, a period of high unionization (around 30%), Shultz understood the importance of collective bargaining and the labor movement.
• As Secretary of Labor under President Nixon, he famously insisted on keeping the federal government out of the Longshoreman strike, forcing management and labor to negotiate directly. This episode is seen as a crucial example of government non-intervention leading to successful outcomes.

Free Markets and Individual Liberty:

• A central theme of Shultz's philosophy was a deep belief in the "fundamental value of freedom and free markets," influenced by the Chicago School.
• He saw an "inextricable link between free markets and individual liberty."
• This belief informed his approach to foreign policy, particularly in challenging the Soviet Union's command economy, which he viewed as being on the "wrong side of history."

Addressing Social Issues and Discrimination:

• Shultz was deeply concerned about racial discrimination and actively worked to increase opportunities for minorities.
• The Philadelphia Plan in 1969, which required federal contractors to hire minority workers, is highlighted. Shultz famously stated he was "ending a quota" of zero African-Americans in certain positions.
• He also chaired the White House Cabinet Committee on Education, tasked with integrating schools in the Deep South. He facilitated agreements by bringing together state committees and allowing them to reach their own solutions, emphasizing that "when parties get this close to an agreement, it's best to let them complete their deal on their own." This approach led to over 90% of black children in the South attending integrated schools by the end of the Nixon administration.

Economic Policy: Closing the Gold Window and Opposing Wage/Price Controls:

• As Director of OMB and later Secretary of the Treasury under Nixon, Shultz was involved in the closing of the gold window in 1971. This move ended the dollar's peg to gold, ushering in an era of floating exchange rates, which Milton Friedman supported as opening the way to a free market for the dollar.
• Shultz strongly opposed wage and price controls, viewing them as detrimental to market function. Despite being overruled by Nixon and Treasury Secretary John Connally, Shultz, as Treasury Secretary, worked to abolish these controls, eventually dismantling most of them by 1974. This is seen as a victory for free-market thinking over statist approaches.
• The panel discussed the economic context of the 1970s, marked by stagflation (high inflation and unemployment), and the debate among economists on how to address it. Shultz, along with Paul Volcker and Milton Friedman, advocated for monetary policy discipline.

Supporting Monetary Discipline and Reagan's Economic Revival:

• Shultz chaired President Reagan's economic policy advisory group, which emphasized disciplining the money supply to combat inflation.
• He supported Paul Volcker's decision to raise interest rates significantly, which, despite causing a recession, successfully broke the back of inflation and set the stage for decades of disinflation.
• The transcript suggests Shultz played a pivotal role in preparing Ronald Reagan for these policies, engaging him with economists like Milton Friedman and fostering an understanding of supply-side economics and the dangers of inflation.

Teaching and Diplomacy with Gorbachev:

• As Secretary of State, Shultz engaged in extensive "tutorials" with Soviet General Secretary Mikhail Gorbachev, using charts and explanations to convey the principles of free markets and capitalism.
• While Gorbachev was receptive, the deep-seated nature of the Soviet command economy made full adoption of market principles challenging. Shultz supported small-scale entrepreneurial experiments ("collectives") as a potential starting point.
• The difficulty in conveying market concepts to Soviet officials is illustrated by an anecdote where a planning official asked for a price list to be updated, demonstrating a fundamental misunderstanding of how market prices are determined.

The "Great Convenor" and Public Service:

• Shultz is described as "the great convenor," consistently bringing together smart people to discuss important issues at the Hoover Institution.
• His interests spanned economics, national security, energy policy, climate change, and North American economic integration.
• He is praised for his integrity, pragmatism, and ability to play the "long game" in policy.
• His approach involved listening carefully, summarizing complex issues, and bridging the gap between intellectuals and policymakers.

Conclusion and Takeaways

The speaker concludes that Powell's speech, while not offering direct monetary policy guidance, served as a "euphemism for bagging on Donald Trump" and his policies by strongly advocating for free markets, minimal government intervention, and the principles exemplified by George Shultz. The emphasis on Shultz's role in removing wage and price controls and supporting monetary discipline is seen as a subtle endorsement of hawkish policies, akin to Paul Volcker's actions.

The discussion on Shultz's legacy offers several permanent lessons:

• Combine Facts, Ideas, and Experience: Deep understanding requires intellectual grasp and practical experience.
• Stay Engaged: Democracy is not a spectator sport; active participation is crucial.
• Integrity in Service: Serve with integrity in any field, making the most of one's skills.
• Participate and Solve Problems: It is both a privilege and an obligation to participate in democracy and address its challenges, but first, one must understand the problems.
• The Centrality of the United States: The US, founded on sound principles and willing to address its issues, has been central to decades of relative peace and prosperity. The nation should not withdraw from its global role.

The event is framed as a testament to Shultz's enduring influence and the Hoover Institution's role in fostering such discussions.