A virtual meeting of the worlds central bankers lacks the glamour and gorgeous background setting of America’s Rocky Mountains. But that did not dampen Fed Chairman Jay Powell’s willingness to take a virtual victory lap when he spoke at the end of last week. He announced that “the baseline outlook is for continued progress toward maximum employment, with inflation returning to levels consistent with our goal of inflation averaging 2% over [unspecified] time … policy is … well suited to address today’s challenges… with high levels of employment and participation, broadly shared wage gains, and inflation running close to our price stability goal.”
That economic background will permit the Fed to reduce – “taper” to use industry jargon – its monthly purchases of $120 billion in bonds and mortgage-backed assets, perhaps but not certainly later this year. Wiggle room retained. Reducing purchases is not the same as tightening by selling off assets, and interest rates will be held at current inflation-adjusted negative levels for some time. Sighs of relief from the White House.
“Transitory” Inflation Pops
All about as expected, including Powell’s insistence that the current inflationary spurt is “transitory”. Which is the most questionable of his conclusions. Inflation has been running at the highest annual rate in almost a decade, 5.4% as ordinary families experience it; 4.3% for “core” items, which is the relevant measure to families that neither drive nor eat; 3.5% as the Fed measures it. The White House, which only three months ago forecast inflation would come in at an annual rate of 2% in the fourth quarter, now thinks 4.8% is more likely. But Powell remains calm.
The chairman noted that:
- prices of some goods, most noticeably apparel, furniture and used cars, have eased. But that was before the spread of the Delta variant, which closed down important suppliers of apparel in Viet Nam and other countries.
- 6 million fewer American are at work than before the pandemic, which means a continued economic boost is required. But many of those 6 million might be baby boomers who have retired, others might have succumbed to the lure of handsome unemployment benefits, still others used the pandemic shutdowns to train to open the record number of new businesses.
- “those least able to shoulder the burden have been hardest hit”. But data gathered by the Atlanta Fed and others show that wages have risen fastest at the lower end of the wage scale. And inflation is hitting hardest those “least able to shoulder the burden”, families for whom food and gasoline claim the largest part of their budgets. Still, Powell has a point: unemployment rates for black men and women (8.4% and 7.6%) far exceed those for white men and women (4.9% and 4.5%). We may be at a point in the history of monetary policy at which full employment is in the eye of the Fed beholder.
- the Delta variant lurks. But that is causing a rise in the inoculation rate, which might offset any drag on the economy. The net effect of Delta is sufficiently unpredictable to have the Fed’s crystal-ball gazers – “model builders” is their job description – reluctant to go into full inflation-attack mode, especially since they can wait for the jobs report at the end of this week.
Data coming in after the chairman concluded his remarks supported his argument that Biden his time is the right thing to do. Pending home sales declined for the second consecutive month, and Goldman Sachs lowered cut its third quarter growth forecast from 9% to 5.5%.
Powell’s Colleagues Fret
Which is what has more than a few of Powell’s colleagues trooping to TV studios to announce their fear that inflation is headed higher and will prove durable. They have several reasons to worry.
First, the economy grew at an annual rate of 6.6% in the second quarter, and the Fed has raised its projection for this year from a hot 5% only three months ago to a red hot 7.2%. Second, House passage of a $4 trillion spending package, and up to $3,600 annual cash for every child, will stuff still more spending power into already-bulging purses and wallets. Add the several trillions of untapped credit available to American companies, and it is reasonable to guess that demand will continue to pressure resources – and prices.
Third, as time marches on it gets more difficult to label this inflation “transitory”. Anyone who believes wage and benefit increases are “transitory” has never been active on the buy-side of the labor market. And anyone who believes that supply constraints will soon melt away has never coped with the sorts of bottlenecks that are driving up costs.
Consider first the situation at our ports, broken links in the global supply chain. At this writing 37 container ships are anchored outside the ports of Los Angeles and Long Beach, the highest number since February. Freight rates have quadrupled since the start of the year, from $3,886 to $16,425 per container from China to the US West Coast. Facilities to move the unloaded goods into distribution channels are choked, and will take years to expand. And when stuff is available, $100,000+ salaries are not attracting enough drivers to get products to warehouses and then on to stores.
To stock their warehouses in time for the holiday rush, many retailers have switched to airfreight, always a much more expensive way of moving goods, and more so since air cargo rates have risen, reports Clive Data Services, by 24% over the past year for shipments from Vietnam, to cite one route. The effect of non-transient port jam-ups drives up costs of sea-borne cargoes, of land-based trucking, and of air freight.
Then there are computer chips, in such short supply that vehicle and other manufacturing plants close awaiting delivery. It will take a bare minimum of two years to build chip factories, after which a long period of worker training is required. That hardly sounds like a transient problem to most people. Meanwhile, the Taiwan Semiconductor Manufacturing Co., the world’s largest contract chip maker, which makes about 90% of the world’s most advanced chips, announced plans to increase the price of its sophisticated chips by 10% and the price of its less advanced chips used in vehicles by 20%.
Powell vs. The Facts
Rising wage and benefit costs; ports and transport facilities jammed and freight rates and wait times soaring; a shortage not only of chips but the facilities and trained labor needed to make them; super-loose fiscal policy; and restless colleagues do not add up to an easy time for a chairman who will be repeating “transitory” at press conferences and in congressional hearing rooms.
Powell vs. Dem Left
If Powell is not around next year, he can console himself that two out of four trips to Jackson Hole ain’t bad. And this might be his last rodeo, as they say in our West. His sensible attitude towards bank regulation has earned the enmity of über-regulator Massachusetts senator Elizabeth Warren, who has Biden’s ear as the President ponders whether to reappoint Powell when his four-year term as chairman expires in February of next year, if pondering is something Biden does on occasion. Powell is an old, white male, with a background on Wall Street, a lethal combination for anyone seeking support from Biden’s progressive wing. If Powell tightens and the economy slows, or doesn’t and inflation persists, Biden can rid himself of the meddlesome chairman in February, just as the November 2022 congressional campaign is reaching full flow.
Failure to reappoint Powell would have the added advantage of allowing the President to toss a rather meaty bone to the progressive wing of his party by choosing a person of color, or a woman, or better still a woman of color unrelated to Wall Street, an appointee far more visible on a regular basis than any member of his cabinet.