Lessons from Jackson Hole
Fed Chairman Jerome Powell gave his much-awaited speech virtually at the annual Jackson Hole summit on Friday. There were no surprises, and he did not rock the boat. Inflation is still “transitory” for the Chairman, and is confined to goods and services affected by covid-related supply bottlenecks. Powell suggested that tapering of bond purchases could start by the end of the year, “if the economy evolved broadly as anticipated” [italics and emphasis mine].
On the inflation front, Powell mentioned that there had so far been no broad-based inflationary pressures. He was selective, however, on the measures he picked to come to this conclusion. No reference was made to the 17% jump in the Case-Shiller 20-city home price index compared with a year ago. Of course, home prices are not a component of the CPI basket, but did the rise — called “truly extraordinary” by the head of investment strategy for S&P Dow Jones indices — not deserve a mention?
Treasury Secretary Janet Yellen recently discussed her concern about rising home prices putting purchases beyond the reach of low- and middle-income first-time buyers. Was the reason Powell made no mention of home prices because the central bank is helping boost them further by purchasing $40 billion of mortgage-backed securities every month?
Soaring rents have been a major contributor to sustaining inflation, but also received no mention in the Chairman’s speech. Rent and owners’ equivalent rent account for about one-third of the CPI basket. The national median rent increased by a “staggering 11.4%” in the first half of 2021 according to calculations by Apartment List. The report points out that during the immediate pre-pandemic years of 2017 - 2019, the rent index increase averaged just 3.3% during January - July. Of course, it would be hard to claim that the jump in rents this year resulted from supply bottlenecks created by covid!
If inflation does turn out to be sustained, Powell assured his audience, the Federal Reserve is ready to raise interest rates. However, an almost century-long study of US monetary history by Milton Friedman and Anna Jacobson Schwartz found that monetary policy’s impact on the economy occurred with a “long and variable” lag. By the time Fed decides to act — if it does act — it may be too late to arrest inflation and the rate hikes may, instead, induce a new recession.
Besides inflation, job growth is part of the Federal Reserve’s stated mandate. Here, Powell justified not starting the tapering now — as some Fed members have proposed — by pointing out that total employment is still 6 million less than the February 2020 level. The recovery has been uneven, in the Chairman’s view, and this requires the easy policy to continue until there is further improvement on the jobs front.
What went unmentioned was the latest JOLTS report published by the US Department of Labor that available jobs rose to a record high in June of over 10 million. The number of vacancies exceeded hires by 3.4 million, and the number of people who quit their jobs voluntarily rose to 3.9 million. These figures suggest that skill mismatch is a major factor in the continuing high unemployment rate. No matter how long Powell and his colleagues on the Federal Open Markets Committee continue with near-zero interest rates and bond purchases, they will not transform a plumber into a nuclear physicist to meet the demand!
A final note: In the next few weeks, President Joe Biden is expected to either renominate Powell to the Chairmanship or find a replacement. It would take a person with heroic resolve to start tapering before the decision is announced, possibly leading to a large correction in the equities market.
Were you taught in Macroeconomics 101 that the Federal Reserve is a politics-free entity, independent of the Treasury and the Executive branch?
Dr. Komal Sri-Kumar
President
Sri-Kumar Global Strategies, Inc.
Santa Monica, California
srikumar@srikumarglobal.com
@SriKGlobal
August 29, 2021
Sri-Kumar Global Strategies, Inc. advises multinational investors and sovereign wealth funds on global risk and opportunities. Dr. Sri-Kumar is regularly featured on business TV and Radio media, and is a frequent speaker in global financial centers on major topics that affect markets and investments.
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