“Transitory is a dirty word,” declared Raphael Bostic, President of the Federal Reserve Bank of Atlanta, last week. “It is becoming increasingly clear that … this episode that has animated price pressures — mainly the intense and widespread supply-chain disruptions, will not be brief.” With the economy adding 604,000 private-sector jobs last month, it is also clear that upward pressure on wages (hourly earnings up 4.9 per cent last month) and labor costs (up 8.3 per cent last quarter) is not likely to abate. Especially since some four million workers have disappeared from the Labour market, some retiring because rising share and house prices have made them too rich ever to work again.
Which created what Yul Brenner’s King of Siam would have called “a puzzlement”. The press is rife with reports of employers’ inability to fill job openings. Pay more, said the President, before signing an infrastructure bill that will create an additional demand for workers and require additional borrowing, causing still further pressure on wages and prices, adding to the likelihood that we will face a wage-price inflationary spiral.
The Return Of COLA And The Weighing Of An Anchor
A forerunner of such a spiral can be seen in the still-unresolved brawl between Deere & Co., maker of agricultural equipment, and its 10,000 striking workers who, by a 55-45 vote, turned down what the company calls its final offer: it will now rely on non-union workers here and abroad. Whatever the eventual final settlement, it is almost certain to revive a provision long absent from labor contracts – a cost-of-living adjustment (COLA), this one every three months to keep wages rising in line with changes in the cost-of-living index.
Iowa State University professor Peter Orazem believes “Inflation expectations are starting to work their way into what people expect to be paid.” And the New York Fed’s consumer survey reveals inflation expectations at their highest level since the survey began in 2013. It was the absence of just such expectations that Fed chairman Jay Powell counted on as his anchor against an inflationary spiral. That anchor has been weighed.
The Taper (Yawn)
Powell conceded last week that supply constraints “have been larger and longer lasting than anticipated”, and that overall inflation is running well above the Fed’s 2 per cent target. But continues to insist that inflation will be “moving down” by the second and third quarters of next year. Nevertheless, he concedes it is time to begin the “tapering” the Fed’s monthly purchases of $80 billion in Treasury bonds and $40 billion in mortgage-backed securities. The $120 billion in buys will be reduced by $15 billion starting this month, bringing that stimulus to an end in mid-2022. The chairman’s decision to pre-announce his intentions prevented a repeat of the financial panic, the “taper tantrum” that followed a similar move by the Fed in 2013.
That is unlikely to throw the economy into a spin, not with cash- and credit-laden consumers opening their wallets as, to borrow from Dr. Scott Gottlieb, the pandemic phase morphs into an endemic phase. A good thing, since a recession immediately before the 2022 elections might well end both Powell’s chairmanship and the semi-independence the Fed now enjoys. The real coolant would be a rise in interest rates, but the time for moving interest rates from their current real (inflation-adjusted) negative level for a Fed that Powell says “can be patient” until unemployment rates for minority groups (7.9 per cent for Blacks, 5.9 per cent for Hispanics) drop closer to that for whites (4.0 per cent; the Asian rate is 4.2 per cent). Guessing as to when the Black and Hispanic rates will be low enough to allow the Fed to raise interest rates ranges from mid-2022, when tapering is completed, to early 2023.
Powell And Warren War For Biden’s Ear
Powell knows that in order to allow the senate time to consider confirming their choices, Presidents have normally renominated a chairman of the Federal Reserve Board or found a replacement by this time. Biden said last week he would make his choice for chairman “fairly quickly” (Powell would remain a governor until 2028, but would not serve as chairman if not reappointed) along with two nominations to fill vacancies and one selection of a board member to fill a four-year term as vice chairman of bank supervision. That should give him room to satisfy all the constituencies beating on him. Except for Elizabeth Warren, should he reappoint Powell: she is calling for the President to bring her the head of Jerome Powell. No need for her to act on the President’s request, reported by Axios, that Dem senators meet with Powell – asap.
The financial and investor communities, impressed by Powell’s quick, innovative and effective response to the pandemic, are supporting his reappointment. No doubt, the soaring share prices that have enriched them, and are a result of the Fed’s zero interest rates, also enhances Powell’s standing with this group. Besides, the financial establishment and moderate politicians see Powell as a safer bet as chairman than mooted alternatives: regulation-minded Fed governor Lael Brainard, or a candidate selected to satisfy the diversity demands of the President’s progressive wing. Markets would remain calm if the President gives them Powell, regardless of his other choices.
That is reportedly what Treasury Secretary Janet Yellen is suggesting, but she is a less reliable advocate since becoming a policy taker than a policy maker. She first announced that she had recommended to the President that he pick someone “experienced and credible.” When that was widely taken as support for Powell, she told Reuters, reports the Wall Street Journal, I think Powell has acquired that reputation, but there are others, too, who I think would be similarly perceived.” Meanwhile, Biden has met recently with both the chairman and Brainard.
OPEC Says No To Biden
Biden has always relied on the political antennae that have seen him through a decades-long battle for the presidency, rather than on a close reading of Keynes’ General Theory of Employment Interest and Money, or the texts on which Bernie Sanders, the driver of administration economic policy, was reared. The President understands that inflation, especially the $1 dollar-per-gallon, 40 per cent, jump in gasoline prices since he took office, is one of those kitchen-table issues to which his beloved middle-class union members – and the less beloved 93.7 per cent of private-sector workers who have declined that status – are sensitive. Which is why he regrets OPEC’s refusal to step up output of the CO2-laden crude oil he told the Glasgow green gaggle he wants left deep in the earth. Sensing a rise from around $80 to $100 for its oil, the cartel and its Russian fellow-traveler decide that its self-interest trumps the President’s. Displaying the discovery of a new economic theory, Timipre Sylva, Nigerian Minister of State for Petroleum Resources, announced to the President and the world, “OPEC has made it clear that we are not looking at prices, we are looking at supply and demand.”
Prices: Nowhere To Go But Up
Inflationary pressures are not likely to recede. Supply bottlenecks will persist, manufacturers will implement already-announced plans to raise prices, workers will demand more, consumers will hoard after a period in which many goods were alarmingly unavailable, businesses will rebuild inventories, and infrastructure cash will add to demand and wage pressures before it eases supply-side bottlenecks.
Biden is looking for a chairman who will prevent an inflationary surge while keeping the job market hot enough to lower minority unemployment and boost the current two per cent economic growth rate. He might consider David Copperfield. Not Dickens’ hero, the American magician.