Federal Reserve Chairman Jerome Powell testified during a hearing of the Senate Banking, Housing and Urban Affairs Committee on the Care Act at the Heart Senate Office Building in Washington, DC, September 2, 2021.
Kevin Dietsch | Reuters
Federal Reserve Chairman Jerome Powell, during his August speech at the annual Jackson Hole Symposium, outlined five reasons to support his view that the current gap in high inflation would be bridged. So far, they haven’t caught on very well.
In fact, each of the five boards has a weakness that, if it does not fail completely, at least damages the Fed’s inflation position and gives the market and consumers a lot to look forward to.
“In the future, wage growth outside the low-wage high-touch sectors and long-term inflation expectations indicators … the Fed will play a key role in determining whether or not to change in a more decisive direction,” Krishna Everco’s Global Policy on ISI And Guha, the central bank’s head of strategy, said in a recent note.
“The risk for the Fed is that even if the momentary story is ultimately correct, it could lead to a crisis.”
(Towards the end of this year?) When these tests are also under pressure, “he added.
In Jackson Hole, Powell mentions “inflation” 89 times in his speech entitled “Monetary Policy in Covid’s Time.”
Although he acknowledged that inflation is “higher”, he added that the situation around it is “dynamic”. He then concludes the passage by emphasizing how he will list the five criteria he will use to evaluate, and that the economy will return to full employment and that inflation will return to the Fed’s 2% target.
Powell’s five-point inflation checklist is as follows: lack of broad-based pressure; Low action on high inflation items; Low wage pressure; Expectations of inflation, and the long-term strength that has kept global inflation low.
Since the speech, the data mostly points to the continuation and in some cases increases the price pressure. Markets responded by raising yields by about a quarter percentage point on 10-year Treasury notes.
To be sure, Powell has plenty of time to get it right, and many professional economists also hold “temporary” positions.
But according to the New York Fed, consumer expectations for inflation continue to rise, rising 5.3% in the following year and 4.2% in the next three years. Both are the highest in the history of a data series that goes back eight years.
Moreover, in recent days traders have raised their bets that the Fed will move faster than expected. According to CME’s Fedwatch Tracker, market prices now mean the first increase in September 2022, after which at least 25 more basis points will be removed before the end of the year. The current Fed forecast is slightly better than the chance of a rate hike next year.
This makes incoming data important as a market, broader economy and congressional policymakers have relied on the Fed to keep policy simple while keeping inflation low. If this changes, the three waves will be felt in three areas.
“The Fed has gone to great lengths to get as many jobs as possible,” said Bob Doll, chief investment officer at Crossmark Global Investments. “Their target was 2% inflation … far from what they expected.”
Five measuring sticks
Powell’s caveat analysis of the five inflationary motives is more subtle.
He sees the head of the central bank as firm on some issues about the momentary outlook but less so than others.
Right off the bat, the case seems to be weak in the absence of any broad-based pressure. Supply chain disruptions have lasted longer than the Fed expected. The impact of prices from these problems has spread to other parts of the economy and has been exacerbated by chronic labor shortages and higher costs of shelter, an important part of the closely watched consumer price index.
Prices of oil and other parts of the energy space are affecting broader activity.
“As a result, ‘the absence of broad-based inflationary pressures so far’ and the fact that the first test is no longer sustainable does not seem reasonable,” Guha wrote.
In issues related to high-inflation items, Powell often cites car prices as the main contributor to headline gains. But used vehicle prices fell in September and headlines remained at a -30-year high, including inflation-energy and food.
At the very least, the September CPI was a warning that inflation could eventually fade, but even better than the Fed expected.
“Further research shows that it may be reasonable to expect moderation in sustainable commodity inflation, but the timeline may extend to 2022 (and in some cases beyond that),” Cave said.
The third part is wages.
Policymakers are pushing for ways to increase workers’ wages, which have been virtually stagnant for a generation. According to the Atlanta Fed, September grew an average of 6.6% per hour per year and 2.2% on a three-month basis.
The two maintained 3.6% annual core inflation as measured by the Fed’s preferred metric, but concerns are growing that terrible wage-prices could spiral if the current situation continues.
“If, overall, wages permanently push materially above this level, the question will be whether companies will be able to pass higher costs in the form of higher prices or absorb higher wages in margins,” Guha wrote.
Powell’s fourth point about inflation expectations depends on the viewer’s eye.
Market-based measures of inflation are not within or above the Fed’s 2% target. One such measure, the 5-year 5-year forward inflation rate, is 2.37%, the highest in eight years.
Customers buy meat at a supermarket on June 10, 2021 in Chicago, Illinois. Inflation rose 5% in the 12 months ending May, the biggest jump since August 2008. Food prices rose 2.2 percent for the same period.
Scott Olson | Getty Images
The rise in inflation expectations “has been relatively rapid and demands monitoring,” Guha warned. Moreover, he said such measures are often linked to energy prices, so if they continue to rise, “market-based indicators could rise further even as household surveys are temporarily stretched further due to rising inflation.”
Finally, Powell has long maintained that the Fed has no control over what is being controlled by inflationary forces – an aging population, low productivity and technological advances.
Guha said the relatively low level of government bond yields, despite expectations of inflation, believes in the argument that structural forces will return when the effects of the epidemic fade.
Nevertheless, he warned that in other cases the markets remain open to the possibility of the Fed making mistakes. The risk is “that the central banks will be forced to go in the opposite direction and eventually
This, in turn, creates an asset price breakdown that has pushed the world economy back into recession. “
Concerns on the Fed and Wall Street
Investors are joining consumers amid growing concerns that conventional knowledge about inflation is wrong.
The Bank of America Fund Manager survey, a closely monitored sentiment gauge for more than 40,000 Wall Street investing professionals, puts inflation at the top market’s “tail risk” or unlikely event that could have significant consequences. This has easily dwarfed concerns over China and concerns over the Kovid epidemic.
There are also concerns within the Fed.
In a recent speech, Atlanta Fed President Rafael Bostick brought a jar with the word “transitory” written on it. This is a sworn jar version of a central banker, where criminals have to donate a dollar for each of their obscenities. In this version, though, the word curse is “fleeting.”
This is because Bostick, who in some circles is considered a long-term bet to replace the current Powell when it expires in February, feels that the moment is not the right way to determine inflation. Instead, he prefers “episodic”, “during the animated price pressure” which he figures “will not be short.”
“Data from multiple sources tends to be longer lasting than initially thought. By this definition, forces are not transient,” Bostick said. “I believe there is growing evidence that price pressures have expanded beyond the handful of items directly linked to the supply chain issue or the reopening of the service sector.”
Even less authorities than the International Monetary Fund have recently warned that inflation could be worse than the transient scenario and require higher rates to control it. In its update on global economic outlook last week, the IMF said there was “high uncertainty” around inflation expectations and said central banks, such as the Fed, should be “ready to act” if it remained stable.
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