The Federal Reserve’s wall of denial about inflation has started to show cracks. Chairman Jerome Powell acknowledged in congressional testimony last week that inflation was running higher than policymakers anticipated and they would not hesitate to “adjust” monetary policy if it starts to run away.
But he reiterated his conviction that price increases are transitory, due to a reopening of the economy with supply and labor shortages.
Lawmakers from both parties grilled Powell on inflation after the June consumer price index released on Tuesday showed a 5.4% jump on the year, the highest since 2008 and higher than the forecast of 5%. Month-on-month, the increase was 0.9% against forecasts of 0.5%.
Transitory Argument Becoming Less Defensible
The questions about Fed policy are arising as the discussion of Powell’s future starts to get some traction. While economists overwhelmingly believe President Joe Biden will follow tradition and reappoint Powell as chairman, uber-liberal Robert Kuttner predicted last week that Biden will name someone new.
Powell’s term as chairman expires in early February, and the White House generally names the new chairman several months ahead of time so the Senate can confirm the choice. Kuttner, who is editor of The American Prospect, was the first to report that Janet Yellen was being considered for Treasury Secretary.
Senator Sherrod Brown of Ohio, the Democratic chairman of the Banking Committee, sharply criticized Powell at last week’s hearing for what he considers lax regulation that has allowed banks to become more powerful. Senator Elizabeth Warren, the influential former presidential aspirant, chimed in with the same critique.
Yellen, former chair at the Fed, evaded a question from a television interviewer last week about reappointing Powell but said she thought the Fed has done a good job.
Of course she does. By keeping asset purchases going full blast and interest rates near zero well after the crisis is over and the economy is rebounding strongly, Powell is doing exactly what she wants him to do, which is exactly what she would do.
Fed independence is looking more like a fiction as Powell dutifully follows the lead of his former boss and the members of the Federal Open Market Committee toe the line. What inflation?
The producer price index, a leading indicator of where consumer prices are going, surged 1.0% on the month in June and 7.3% on the year. The Beige Book, which collects anecdotes from contacts by the 12 regional banks with local businesses, once again indicated a majority of those expect price pressures to continue for some time.
The evidence, in short, indicates that Powell’s insistence that inflation is transitory is becoming less defensible. Even if these high readings abate as the base effect of depressed prices a year ago fades, to call a mismatch between supply and demand that could last many months transitory begs the question.
Richmond Fed chief Thomas Barkin told the Wall Street Journal that it’s still too soon to consider reducing the Fed’s monthly bond purchases from the current level of $120 billion. The employment to population ratio, which was 61.1% in February 2020 before the pandemic struck, was still only 58% in June and needs to get solidly above 59% before policymakers can discuss tapering, he says.
James Bullard, head of the St. Louis Fed, indicated the time is near to start tapering bond purchases. “I don’t need to get going tomorrow, but I think we’re—I think we’re in very good shape for this,” he said in an interview.
Central bank policymakers in other countries are less hesitant. The Bank of Canada cut its bond purchases by C$1 billion a week in April, to C$3 billion (USD$2.4 billion), and last week said it will cut a further C$1 billion (USD$784 million) a week.
Michael Saunders, an external member of the Bank of England’s Monetary Policy Committee, said last week that the British central bank should take action to curb inflation and suggested he would vote to reduce bond purchases as soon as the meeting early next month.
It marked a turnaround for the dovish policymaker and came as David Ramsden, a deputy governor and member of the MPC, also said he was worried about inflation after Britain registered a 2.5% increase on the year in June.
The two policymakers say they disagree with Governor Andrew Bailey, who continues to insist the bank is right to leave policy unchanged.