I Know It When I See It

Macroeconomics can be very personal.  Those observing the changes in its machination are often watching the same or similar factors, yet their description of an economy can be very different.  While decorum is often kept in the field, sometimes things are said which evoke thoughts of obscenity.  This happened Wednesday as the Chair of the Federal Reserve, Jerome Powell, responded to a question from the press.

In 1964, United States Supreme Court Justice Potter Stewart famously used the phrase “I know it when I see it” to describe obscene material in Jacobellis v. Ohio, a well-known free speech case.  Essentially, the phrase conveys the idea that someone recognizes or understands something intuitively or based on personal judgement, even if they find it difficult to articulate the concept.

While responding to a question from a CNBC economics correspondent about the persistence of inflation in the Federal Reserve’s projections, Chair Powell replied with an answer centering around the “neutral rate”: a Fed Funds rate which is neither restrictive nor accommodative to the economy.  He could not commit to a specific rate estimate for a neutral position, but did say, “We know it by its works.  We know it when we get there.”  He seems to be commenting that the economy will respond a specific way once the neutral rate is achieved.

In essence, we have a central bank which is balancing the interplay between experience, intuition, and the limits of language.  Those at the Federal Reserve are dealing with circumstances that are not mentioned in the textbooks from which they learned.  Nobody studied a global shutdown followed by record money printing and an inflation surge which followed.  These folks at the Fed are easy targets to blame, but Atlas believes it is a difficult job.  At least we think we know a difficult job when we see one.