Kudlow: Jerome Powell’s ‘Rules-Based’ Fed Policy Is Promising

February 27, 2018

Larry Kudlow, the Reagan administration economist who advised the Trump campaign on fiscal policy, said he was encouraged by Federal Reserve Chairman Jerome Powell’s comments today about a rules-based approach to monetary policy.

Powell, who this month succeeded Janet Yellen as head of the U.S. central bank, provided regularly scheduled testimony to the House Financial Services Committee, his first appearance on Capitol Hill.

Kudlow said he was most intrigued by Powell’s prepared remarks about consulting monetary policy rules to help set interest rates. A rules-based approach makes Fed policy more predictable for investors, especially in the context of the Taylor rule, a guideline developed by Stanford economist John Taylor for setting interest rates in relation to inflation and measures of economic slack.

“I’ve never seen that in any testimony before,” Kudlow said on cable channel CNBC. “Monetary rules — that is new for the Federal Reserve, and I think that’s progress.”

The Taylor rule suggests that the Fed’s short-term target rate should be double its current level, Jack Ablin, chief investment officer of Cresset Wealth Advisors in Chicago, said on CNBC. The Fed Funds rate is currently about 1.25 percent to 1.5 percent, the highest since the financial crisis of 2008.

Kudlow also praised Powell for expressing a hands-off approach to the market. One major criticism of the Fed is that it has distorted the market process of price discovery that helps to measure investor perceptions of risk.

“He’s very market-oriented, and I like that very much,” Kudlow said. “I think we need someone like that, very pragmatic-minded.”

A market-based approach doesn’t necessarily mean that Powell would enact interventionist policies to lift markets, Kudlow said. Critics of former Fed Chairman Alan Greenspan said he implemented the “Greenspan put” to protect investors from losses during the 1990s, a policy that led to the dot-com bubble.

“My personal outlook for the economy has strengthened since December,” Powell said in his testimony. Signs of better wage growth and inflation made him more confident about the economy, he said.

Powell also said he “wouldn’t want to prejudge” whether Fed officials would schedule four interest-rate increases this year instead of the three they forecast late last year.

Stocks and Treasuries declined on Tuesday as investors considered whether Powell’s commentary meant that the Fed would raise interest rates faster in response to a strengthening economy.

The S&P 500 Index fell 1.3 percent to 2,744.27, its biggest decline in more than two weeks, while the Dow Jones Industrial Average dropped 299.24 points, or 1.2 percent, to 25,410.03. The Nasdaq Composite Index also declined 1.2 percent.

The Fed’s favored measure of price increases, the index for personal-consumption expenditures, should rise to the central bank’s 2 percent target “over the medium term,” Powell said. “Wages should increase at a faster pace as well.”

The Senate Banking Committee will hear Powell’s testimony on Thursday. The Commerce Department that morning will publish inflation data for January that might show consumer price growth moving closer to the Fed’s goal.