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Why the Fed needs to start turning off the spigot

August 27, 2021, 9:17 AM UTC

Good morning.

The Federal Reserve Bank of Kansas City’s annual Jackson Hole conference is about as exciting as monetary policy gets. It gives central bankers an opportunity to spend a few August days in one of the most beautiful spots in the world… and talk a bit about economic policy while there. I’ve gone a couple of times in the distant past, and would go again if ever invited.

But this year, there will be no Grand Tetons. The meeting has gone virtual. And that leaves only the policy makers’ words to attract attention. The big talk topic on the table: Isn’t it time (or past time) for the Fed to start pulling back its extraordinary “quantitative easing” support for financial markets?

I give Fed Chairman Jerome Powell enormous credit for his quick and aggressive actions to shore up the economy in the face of a pandemic. But the U.S. economy has now recovered to pre-pandemic levels, inflation is higher than it has been in many years, and unfilled jobs are going, well, unfilled. Former Chairman William McChesney Martin famously said the Fed’s job “is to take away the punch bowl just as the party gets going.” This party is well underway.

I understand many people are still suffering, particularly in the hard-hit hospitality, transportation and food service industries. But it’s not clear to me that the Fed’s buying of financial assets is doing much to help those people. It mainly helps those who own financial assets.

So let’s hope Powell does the right thing today, and starts turning off the spigot. The only thing arguing against it, as former Treasury Secretary Lawrence Summers says in this piece published yesterday in the Washington Post, is that the Fed feels “a need to maintain credibility given previous commitments, and a reluctance to accept the immediate pain and dislocation associated with changing course.” Financial markets will be unhappy, as they always are when the Fed moves to tighten. But financial markets have had more than their fair share of happiness during the past year. An adjustment is in order.

More news below. 

Alan Murray
@alansmurray

alan.murray@fortune.com

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This edition of CEO Daily was edited by David Meyer.

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