For monetary policy, slow and steady wins the race

Economic observers and Federal Reserve Board critics could take a lesson from the story of the tortoise and the hare. While a turbulent pandemic economy has led many to wish for a quick fix, the central bank’s deliberate approach to interest-rate decisions and other monetary policy moves is probably the way to go.

In his virtual speech   Federal Reserve Bank of Kansas City’s Jackson Hole conference in August 2021, Fed Chairman Jerome Powell laid out the challenges facing Fed policymakers as the Delta variant roils the economic waters. Calling the economic recovery from the first waves of Covid-19 “vigorous but uneven,” Powell focused on the downside of a quick recovery.

“Booming demand for goods and the strength and speed of the reopening (of the economy) have led to shortages and bottlenecks,” Powell said. And those shortages and bottlenecks have added a level of uncertainty about future economic growth that makes many people uneasy.

This is uncharted territory for the Fed. The usual economic models of boom-and-bust cycles offer few clues to the likely course of the economy and the dark cloud of the pandemic continues to cast a long shadow over any potential policy moves the Fed might take.

“The pace of the recovery has exceeded expectations,” Powell said in his speech. Compared to the recovery after the Great Recession, economic growth rebounded in less than half the time after the first waves of Covid-19 receded, rendering the “normal” economic playbook less useful. And Powell warned there will likely be more unexpected twists and turns ahead.

“Given the ongoing upheaval in the economy, some strains and surprises are inevitable,” Powell said.

That means our usual expectations of a robust recovery following a downturn must be set aside as the pandemic economy plays out and Fed policymakers work the monetary policy levers.

While Powell carefully and succinctly surveyed the economic landscape, with special attention on inflationary pressures ahead, he offered perhaps the most telling idea of what to expect – and why it is important to be patient as the situation evolves.

While most people see monetary policy as having immediate effects on price stability and employment, the truth is it takes time for those decisions to have a real impact on the economy.

“The main influence of monetary policy on inflation can come after a lag of a year or more,” Powell said.

And in that case, economic patience is truly a virtue and it really will be slow and steady that wins this particular race.