The editors of the Wall Street Journal have some questions for Federal Reserve Chairman Jerome Powell. First and foremost they wonder what he thinks is happening:
The yield on the 10-year Treasury note—the most important price in the global economy—surged to 1.37% Monday from 0.917% at the start of the year. The German 10-year bund, the eurozone’s benchmark bond, on Monday hit an eight-month high of minus-0.28%, after rising 12 basis points last week. Japan’s 10-year government bond reached a two-year high of 0.12%.
No doubt this is in part a healthy response to good pandemic news. Falling case counts in the U.S., U.K. and other vaccine leaders are bringing the light at the end of the lockdowns into sight. Bond investors expect growth to revive, and rising yields signal faster growth. If this is correct, expect economic optimism to push yields still higher despite the Fed’s near-zero short-term rate target and aggressive asset purchases.
But Mr. Powell has gone to extraordinary lengths to keep yields low, so how does he view these recent bond movements? Is this healthy, and is he content for investors to make their best guesses about the recovery? Or does he intend to fight investors, perhaps with some version of Japanese-style yield-curve control that would set rates by fiat at longer maturities? If so, why?
A less benign reading of bond-price trends is that investors expect that the combination of economic recovery, loose monetary policy and a fiscal blowout from the Biden Administration will stoke inflation. An early warning might be last week’s report of a 1.3% January increase in producer prices, a post-2009 high.
Inflation already is here if you look at asset and commodity markets instead of consumer prices. Bitcoin is up about 80% this year despite an Elon Musk-induced plunge Monday; copper has nearly doubled in price per ton since March; emerging-market bonds have been issued in higher-than-normal quantities this year, at abnormally low interest rates; the S&P 500 and Nasdaq set new records this month; the U.N.’s index for global food-commodity prices reached its highest level since 2014 in January; the Case-Shiller housing index rose 9.5% in November, the fastest pace since 2014; and Brent crude oil is back to about $65 a barrel.
Some of that is related to rosier economic growth prospects after a terrible year. But how much? Some of the price rises appear to be attributable to less benign supply pinches as the economy continues to adapt to the post-Covid era. Nor can one ignore the phenomenal 26% increase in the money supply as measured by M2, which John Greenwood and Steve H. Hanke flagged in these pages Monday.
Which brings us back to Mr. Powell, who with his predecessor, Treasury Secretary Janet Yellen, seems convinced that since inflation didn’t ignite after 2009 it never will again. He also sounds sanguine about the risks of soaring asset prices, for which he’s said monetary policy isn’t a suitable remedy anyway.
What, precisely, makes him so sure inflation isn’t a danger? Is he recalibrating his inflation expectations in light of the unprecedented runup in household savings over the past year, a fiscal blowout of world-historical proportions, and much faster growth in monetary aggregates than occurred after 2009? If not, why not?
The question I would ask him is this. Is he unconcerned about inequality? Rapidly increasing asset values increases the disparity in both wealth and income between “the rich” and the rest of us. Additionally, when those inflated asset values leak into the non-monetary economy by, say, purchasing land or houses or buildings or anything else that impinges on the non-financial economy, it might increase the values of those things as well to the detriment of the non-rich.
Powell has stated he is concerned about inequality — but he repeats his view last year (which he said again today);
https://www.reuters.com/article/us-usa-fed-inequality/feds-powell-puts-spotlight-on-unequal-u-s-economy-citing-pain-of-racial-injustice-idUSKBN23H3HU
“The “biggest thing†the Fed can do to combat high black unemployment and other economic inequities, he said, is to use its tools to push down unemployment.”
And Powell has a point. Labor wages for the bottom quartile rose faster then the upper quartile during 2017-2019, a very notable change in trend; during the tightest labor market in 2 decades.
A alternate perspective. The question is what combination of monetary, fiscal, and regulatory policies can generate a tight labor market. Many economists like Lacy Hunt argue that the current policies are medium-term deflationary. The fiscal policy of borrowing to support consumption, and too loose monetary policy supporting speculation, don’t generate long term income streams so eventually all one has is an increase in debt, which is deflationary. It is deflationary until (or if) we decide to truly monetize the debt, then it is hyper-inflationary.
In the very short term; there will be some inflation, but these are more due to the supply chain disruption and consumer preferences changes due to the pandemic then any monetary policy.
A political note — I somewhat sympathize with Powell’s position. He has 9 months left in his term. If I were him, I would pull a Sherman; “I will not accept if re-nominated….” Democrats are setting him up as the fall man if their economic policies has adverse effects; while they won’t give him any credit if they succeed. He probably only wishes for no market accidents in the next 9 months.
As I have been saying for some time. Wages of low income workers in the U. S. grew faster in 2019 that they have for decades in aggregate. How will monetary policy improve on that? I can see how monetary policy can make the rich richer though.
“How will monetary policy improve on that?”
Its asymmetrical. It maybe very hard for monetary policy to improve the labor market; but very easy for monetary policy to kill it. Looking at the muni bond market, the corporate bond market, a lot of cities and corporations would go bust if the Fed stopped being extremely accommodative. Sometimes they are called “zombies”, those zombies employ a lot of workers.
To even talk about adjusting to the new normal and letting the zombies die would require political support for the Fed from the Treasury and the President. The political situation between Powell, Yellen, and Biden is practically 180 from Volcker, Regan, and Reagan.
I am worried about the economic distortions of the mania going on… but there are no easy answers that avoids a lot of pain.
“The question I would ask him is this. etc”
I think my views have been expressed ad nauseum.
“The fiscal policy of borrowing to support consumption, and too loose monetary policy supporting speculation, don’t generate long term income streams.”
Borrowing is just a financing scheme. It should be used to finance large and long lived assets (eg a house) which cannot be paid for in cash by most. Debt financing always comes with risk. I should know. Hunt is just stating in an alternative way, “you can’t change the value of the firm by changing the capital structure; you can only change the risk/reward relationship to capital.” Very few understand this.