Tuesday, January 10, 2023

The Fed and Confusing Signaling

Mr. Powell, the Chairman of the Fed, iterated his strong commitment to reducing the inflation rate. That's reassuring if its true. But actions speak louder than words and even his words are not unambiguous.

He directed some of his words at climate change -- saying that he would not be a climate change policymaker.  I am not sure how the Fed can change climate, but let's not go in that direction.  Perhaps what he really meant to say is that he is not going to let money grow willy nilly just because climate threated a recession. But I don't think he meant that. He also said in the same statement that he was going to "support strong job growth."

There is nothing wrong with wanting strong job growth. But Fed watchers understand that sometimes in order to get strong growth you first have to kill inflation. That is, we often have to live through some weak growth first if we are going to get strong growth later. It's kind of like living through the effects of a dose of medicine before we get better. But Doctor Feelgood might want to promise a cure without any side effects. 

Markets didn't react strongly to his statement. The stock market rose a smidge and interest rates fell a bit. Not much to write home about. 

But inflation rages on. After peaking at 17% mid-year 2022, the monthly inflation rate has receded. Yet in November of 2022 inflation was 7% higher than in November of the year before. There is much to ring out to get the job done. 

Powell's credibility is at stake here. It won't be easy to get inflation well below that 7% momentum. I wish him luck. 



5 comments:

  1. To me this seems transparent when one considers the political incentives and role of perception versus truth. (I have heard that a Congressional staffer once said that inside the Beltway the truth is sometimes interesting but it is perceptions that really matter.)

    Thus, the Fed continues to attempt to provide some political cover for the Biden Admin and its former colleague Yellen, in this case by giving lip service to job growth. Perhaps this is because many believe that we are beginning to observe a reversal of a previously very strong job market as some major firms announce large layoffs.

    Sadly, over time we have observed the Fed move farther away from being, at least ostensibly, a apolitical institution. The Fed held off raising rates for as long as it could to benefit the Biden Admin until it became untenable to do so and retain any remaining credibility. Had the Fed moved sooner it would likely not be necessary to raise rates as high as will be required to get inflation under control after record government deficit spending under this admin. But there was a midterm election in which a "Red Tsunami" was predicted. So the original idea was (obviously to me) to defer rate increases in order to not rock the economic boat until after the midterms. Now the effects of inflation are being felt in significant terms by voters at the grocery store and elsewhere.

    A related big problem created by the necessity for high rates for the Biden Admin will come from the home sector drying up due to lack of affordability with rates high. I read this has already begun in many locales with home prices starting to decline and mortgage demand weak. With the financial security net for many households nearly nonexistent, job loss due to business disruption and layoffs pose the risk of severe pain for many families. Fox News showing families moving out of single family dwellings they can no longer afford in U Haul box trucks and into apartments would look ugly and spawn much defensive perception management.

    When we first started down the path of massive federal spending two years ago I feared the resurrection of a term I had not heard much since the Carter and early Reagan days - stagflation. I read many bank economists are predicting a severe recession in 2023. So what happens first, the economy tanks or inflation starts falling opening the door for some rate relief? Seems to me the Biden Admin and Fed are gambling on the latter - and especially that the pain will be over a year prior to the 2024 election allowing Biden to claim he's responsible for a recovery. Stagflation is the alternative. Ergo we get such paradoxes as talking job growth even as we are apparently on the brink of the opposite. Perception management meets a political rationality test even if its rhetoric fails economic rationality.

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    1. Nice John. Inflation should come back to bite Biden on the arse. Of course, we will all suffer and somehow he will slither out of it.

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  2. Dear LSD. Powell et al @ Fed can’t find the exit from the Chinese fire drill they’re in ‘cuz Biden’s block’n all the exits with his ‘boot on the neckz of bidiness’ – especially the oil companies. Consumer demand is good but de bootz are prevent’n supply-side initiatives that wud help reduce ‘flation. Ergo ‘n henceforth, Bidenflation will persist. Disinflation likely . . . . typical/historical +3% growth post inflation/recession unlikely as is stabiliz’n Powell’s credibility. But, remember . . . health, wealth, ‘n happiness may perish but thirst is eternal. ‘appy ‘our soon . . . cheerz!!!!

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  3. There are several major things that may impact inflations and Biden's program. Growth is one. In my small community there are 10,000 supposedly affordable apartments and houses be "stick" built with average rental or monthly mortgage cost of $1,400 at the new interest rates. Most have transferred from the north to FL due to better climate but not pay scales. Plus the service cost from the county and city is paid by taxes.....but affordable residents can ;hardly affords. this and are leaving empty home in the low home demand, Midwest and Northeast This just one one micro impact of inflation.

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