Fed Watch: Chaperone No More, Central Bank Is Leaving Punchbowl In Place

There’s probably no metaphor more overworked than the punchbowl the Federal Reserve is supposed to take away when the economic party gets going, even though real punchbowls have gone out of fashion and younger investors may have little idea of what is meant.

San Francisco Fed chief Mary Daly said last week that investors should not worry, because “we won’t be preemptively taking the punchbowl away.” Nosirree, to use an expression current when punchbowls were. (And that is not “No, Siri.”)

Communications Blitz, Assurances Of Faster-Than-Expected Recovery

Fed policymakers went on a communications blitz last week with uniform speeches about the need for patience as the central bank intends to let the economy dynamics play themselves out and not spoil the fun.

The punchbowl metaphor is attributed to longtime Fed Chairman William McChesney Martin who said in 1955 the Fed is there as:

“...a chaperone who has ordered the punchbowl removed just when the party was really warming up.”

However, the former Fed chair cited an unnamed writer for coming up with the comparison.

In her  Q&A last week, Daly added that taking away the proverbial punchbowl is “something that worked maybe in the past, definitely doesn’t work now, and we’re committed to leaving that punchbowl or monetary accommodation in place until the job is fully and truly done.”

Atlanta Fed chief Raphael Bostic avoided the punchbowl metaphor altogether, but insisted that the Federal Open Market Committee doesn’t want any speculation that would undermine the momentum in the economy from monetary accommodation.

The Fed will keep accommodation in place until recovery is “well and truly done,” is the way Fed Vice Chairman Richard Clarida put it, echoing Daly’s remark almost verbatim.

He pooh-poohed warnings from former Treasury Secretary Larry Summers and former International Monetary Fund Chief Economist Olivier Blanchard that record government spending is setting the stage for higher inflation. In his view, the deficits don’t “represent a long-term, persistent risk of inflation.”

Richmond Fed President Thomas Barkin told Reuters he didn’t want to “overthink” the date of an eventual policy change until actual outcomes indicate it is time.

This central bank laxity prompted some analysts to use another tired cliché—the remark from hockey legend Wayne Gretzky that he skates to where the puck is going to be, not where it is. Some investors want the same kind of champion play from the Fed.

Chicago Fed President Charles Evans is not racing for that elusive puck—he is more concerned about not going backwards. “We are not just going to backtrack if we hope, and have a forecast, that we are close,” he said, in a virtual discussion about when the Fed might be prompted to act as the economy picks up speed.

Fed Chairman Jerome Powell said on Thursday that massive fiscal stimulus and a faster vaccine rollout have set the recovery on a much quicker pace than anyone expected. But he emphasized that the Fed would keep its accommodation in place until the economy was near full recovery and would pull back only slowly and with plenty of advance warning.

He compared the Fed action to counter the pandemic to the Dunkirk evacuation. “It was time to get in the boats and go, not to check the inspection records and things like that, just get in the boats and go.”

And he has no regrets, despite warnings that the Fed’s expansion of its balance sheet and other measures will create problems. He said:

“Ultimately, in a crisis I think what we did served its purpose in staving off what could have been far worse outcomes.” 

This may sound a bit self-serving. Indeed, investors are less sanguine than Powell or the FOMC members about how temporary an uptick in inflation will be.

As expectations for inflation top 3% on a consistent basis, many analysts are saying the Fed is behind the curve and will have to start raising rates next year—not in 2024 as most of the policymakers say.