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 inflation’s 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 couldn’t 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’s chief market strategist David Zervos—who has stood by Powell over the past 18 months—is taking a victory lap amid the economy’s resilience, branding the Fed’s critics “Jay-haters” and “Armageddonistas.” He’s 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, ensued in March. University of Pennsylvania professor Jeremy Siegel, along with Yale’s Jeffrey Sonnenfeld and Steven Tian, argued in a March Fortune op-ed that “shrapnel” from the Fed’s rate hikes “killed” SVB and “may send the economy into recession in the process.”
But despite the consistent warning from Fed critics, the recession hasn’t come—at least just yet—and inflation is now down more than four 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 Fed’s rate hikes.
The former advisor to the Federal Reserve Board, who boasts decades of Wall Street experience, says he believes the central bank’s rate hikes have had their desired effect, lowering inflation without sparking a recession. Powell has maintained the Fed’s 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.”
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 toward catastrophe as they raised rates in the face of fading GDP growth.
“I think maybe they’re just not up for the task,” he said of the current slate of Fed officials. “Maybe they’re not smart enough to understand the impact of their actions. This is kind of like, and I’m not kidding here, the inmates running the asylum.”
Howard University’s William Spriggs also admonished Powell’s 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 wasn’t much “new to say” to these critics on the macro front given inflation’s downward trend and the economy’s 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. It’s time for them to make heartfelt amends with Jay.”
Of course, some might argue that Zervos is celebrating too soon. A number of investment banks—including Bank of America, Wells Fargo, Nomura, and more—believe a recession is still coming this year. And even the Federal Reserve’s own staff still has a mild recession as their “base case” for the economy. Nick Brooks, head of economic and investment research at private equity firm Intermediate Capital Group, also told Fortune Monday that despite recent economic resilience many of the traditional recession indicators “are flashing bright red.”
Zervos’s 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 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.”
Here’s that template:
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 U.S., 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 Hall’s 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.]