Jacob Frenkel has earned many accolades and taken on many roles in his career as an economist and central banker. Start with his years at the University of Chicago as the David Rockefeller Professor of Economics. Move on to the International Monetary Fund as the director of research and chief economist. And then to the Bank of Israel as a two-term governor where he stabilized the nation’s economy and integrated it into the world economic system. And don’t stop there - next he was chair of the Group of 30 as well as the Chairman of JPMorgan International.
But it’s in late August, as the Federal Reserve Bank of Kansas City opens its annual symposium, when Jacob shines like few others can: this year marks 40 consecutive years that he has attended the event as a speaker, panelist and, in my mind, someone who always has a story to tell that not only illustrates the key points he wants to make but often gives me a good chuckle.
So what is the story he wants to tell this year? One of them is about the speech that Jay Powell gave to open the proceedings of the event on Friday morning, as the reigning Fed chair always does. Another one perhaps even more critical now is about central bank independence and why it is so important not only to the strength of the U.S. but also the global economy.
Let’s start with the speech heard round the world, where Powell opened the door to a rate cut at the Fed’s September meeting even as he felt compelled to vow that the Fed will not let inflation get out of control if tariffs lead to higher prices, as many say at this point say they certainly will.
People moved by Powells final J-Hole appearance 00:02:06:12
I think basically people in the room, governors of central bank, financial sector, research directors, economists expressed great appreciation and thanks for his contribution. And in a way also gave him support of saying, listen, you are guided by your professional conscience and of the FOMC. Stick by the guns and do the right thing for the economy.
Kathleen: I just have to add one thing, because I was speaking to various people yesterday afternoon, and at least one person told me that there are people even have tears running down their cheeks.
Jacob: Well, it was emotional. It was emotional and genuine. That's the important point.
A positive reaction to the speech- 00:03:03:13
Kathleen: And they reacted very positively because they said, oh boy. He didn't just open the door. He's getting ready to walk through that door to cut rates. Do you have the same message interpretation as the markets?
Jacob: Well, I think it's important to put it in the same context that Jay Powell has put it. He started by saying we are having and we have had now at least two important developments that will influence our economy and our behavior. Number one, there is a new tariff approach which generates a lot of uncertainty and maybe price pressures. Number two, there is an immigration focus.
Powell vows to stop any knock-on inflation impact 00:03:57:07
These two are having impact on the labor market, which is the subject of this conference, but also at least with the tariffs, it immediately has some price effects. Now the price effects are not happening at one-time. They are spreading over time. And while Jay Powell was very, very clear in saying something that may be a once and for all price level change, the Fed will be certain not to allow this price “once-and-for-all’ price level change to be translated into a dynamic of inflation that will the unanchor the economy from the 2% target.
Inflation to be stoppered AND rates to be cut 00:04:48:03
They're charging people maybe. Is there not a chance that becomes persistent? Well, this is the point. It may show itself in the price level and will the Fed's tasks is guided by the statement of yesterday is that it will do whatever it takes, so to speak, to prevent these two spiraling into the system. I think that with this in mind, he added one important sentence, namely circumstances may be such, and maybe we are getting closer to these circumstances that will enable us to start lowering rates.
The Fed will be data dependent- 00:05:22:23
However, we will be data dependent. We will need to see what it is. So with the very same statement that kept his hope, these options open markets, some of them have interpreted, it is as if we have just had a announcement about lower rates.
Fed focused on anchoring inflation expectations 00:06:02:10
I think that's what a lot of people who are watching the Fed now and a little more concerned about the message they think they got here as well. That… that's the risk here. Well, the risk may happen if the fed takes its eyes off the ball. I think that the emphasis on price stability and of anchoring the inflationary expectations to not to exceed the 2%, this emphasis has remained, of course, this conference focus very much on the developments in the labor market and how it interacts with Fed policy.
Fed policy has limitations 00:06:38:14
These are very important because we saw changes in labor force participation and in the unemployment is seen. But by and large, the fed cannot impact on the long term unemployment trend. It can impact the long term inflation trend. So let's take another look at, fed independence, which we just mentioned, the standing ovation for Jay Powell and more.
The Fed is a central banking independence model 00:07:27:17
It's central sympathy for central bank, for central banking. Well, let me just say the Federal Reserve, being the strongest and most important central bank in the world, is setting the tone for the style of central bank and the stability that the central bank generated by the fed will have is a public good. And it's important that this public good for the world economy is maintained. We are all desiring and hoping that the fed independence will be maintained, because that's the way they will set the tone for the world financial system.
Fed has missed its inflation target but during challenging times 00:10:24:20
<<Kathleen> The Fed hasn't met its 2% target for a long, long time. Is that something that is going to be less likely to happen now?>> And maybe even affect things around the world? Well, this fact, remember, we have had a period with unusual shocks that came from areas that we did not anticipate before, whether it is the pandemic or the war or whatever. I think that we should also be aware of the fact that the Fed has done a review of its machinery, of the way in which it conducts policy, in the way in which it analyzes policy, which means it's a living organ responding to the realities and affecting the realities.
Jacob Frenkel
Jacob Frankel is a well-deserved leader in the global economy, with over 40 years of rich experience in the global macroeconomic field and large financial institutions. He is a former governor of the Bank of Israel and former chairman of JPMorgan Chase International. H has also served as JPMorgan Chase amp; Member of the Co International Council, he is also Chairman Emiritus of the G30 Group. From 2001 to 2011, Frankel served as the Chairman and CEO of G30 Group; From 2004 to 2009, served as the Vice President of AIG Group; From 2000 to 2004, he served as the Chairman of Merrill Lynch International at Merrill Lynch Group. Prior to this, he served as the governor of the Bank of Israel for two terms from 1991 to 2000. During his tenure, he reduced inflation in Israel, achieved price stability, liberalized Israel's financial market, eliminated foreign exchange controls, and integrated the Israeli economy into the global financial system. Prior to serving as the Governor of the Bank of Israel, Frankel served as Vice Chairman of the EBRD Board of the European Bank for Reconstruction and Development from 1999 to 2000, and as Chairman of the Inter American Development Bank Board of the Inter-American Development Bank from 1995 to 1996. From 1987 to 1991, he served as the Economic Advisor and Research Director of the International Monetary Fund (IMF). He taught at the University of Chicago from 1973 to 1987 for 15 years and served as the editor in chief of the Journal of Political Economy.
