Just two weeks after telling an audience at Stanford University that inflation was on a “bumpy” road toward the Federal Reserve’s 2% target, Chairman Jerome Powell abruptly shifted on Wednesday. He realized the endurance of rapid price increases by indicating that inflation was “taking longer than expected” to reach the target. If you were among the investors who had taken the Chairman at his word and thought we were entering a low-inflation environment, you are out of luck. Imagine how the managements of financial institutions that bought long-dated Treasurys in 2021 based on Powell’s “transitory” inflation expectation must have felt when inflation and bond yields went the other way!
Following the Powell Pivot, his senior colleagues felt free to abandon the rate cut wagon. John Williams, President of the New York Fed and the Chairman’s close colleague on the Federal Open Market Committee, now sees no urgency to cut rates. But that was not all. In answering a question at a conference on Wednesday, Williams admitted that “if the data are telling us that we would need higher interest rates to achieve our goals, then we would obviously want to do that.” Ouch! Markets did not like that.
Among the others to abandon rate cut expectations was Chicago Fed President Austan Goolsbee. Speaking on Thursday, he said progress on mitigating inflation had “stalled.” Compare this with Powell’s and Williams’ views earlier this month that inflation was merely on a “bumpy” path. "Given the strength of the labor market and progress on easing inflation seen over a longer arc, I believe the Fed's current restrictive monetary policy is appropriate,” he said, suggesting that we “wait and see” before cutting rates.
Prompting the switch was not only the upturn in the March consumer price inflation figure that was released on April 10, and discussed in SriKonomics last week. We also learned from a Census Bureau data release on Monday that US retail sales rose by 0.7% in March, more than double the 0.3% pace that had been anticipated. The latest retail sales figure followed an upwardly revised 0.9% gain in February. The February and March figures signaled that consumer spending continues to be strong despite the interest rate increases that the Federal Reserve implemented during 2022 - 2023. In turn, robust consumer spending is working against slowing the pace of inflation.
All this puts Fed officials in a tough situation with little wriggle room. They fear that the continuation of high interest rates would increase chances of the economy falling into recession in an election year despite current signs of strength. To worsen its predicament, the Fed got a second nudge from President Joe Biden whose administration takes pride in not interfering with monetary policy. At a White House press conference shortly after the March CPI data release, the President said, “I do stand by my prediction that before the year is out there will be a rate cut.”
How did the central bank find itself in the tight corner? At his press conference on December 13, Chairman Powell put himself squarely in the camp of those expecting several rate cuts in 2024. Unprompted, he stated his belief that rates were at their peak and that the FOMC focus had shifted from how much further to increase rates to discussing when and how much to cut them. Powell’s views propelled risk asset valuations upward. And, as SriKonomics has discussed in the past, market rallies put more money in consumer wallets and make it that much more difficult to bring inflation down.
Arthur Burns, Chairman of the Federal Reserve in the 1970s during the Nixon and Ford administrations, adopted stop-and-go measures — tightening and easing — in attempting to bring inflation down. That only made inflation more enduring. Powell appears to have adopted Burns as his model at his December 13 press conference and he is seeing the consequences.
Jerome Powell, the first Fed Chairman since G. William Miller (1978 - 1979) to have taken on the job without formal academic economics training, is finally getting his education. That is the good news. The bad news? The tuition cost and student debt (no pun intended!) are being borne by not only American taxpayers but by the entire world.
Dr. Komal Sri-Kumar
President
Sri-Kumar Global Strategies, Inc.
Santa Monica, California
srikumar@srikumarglobal.com
@SriKGlobal
April 20, 2024
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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Komal Sri-Kumar for Fed Chairman!
I thought too much money supply vs. demand for money was the cause of inflation. Why would a strong competitive economy make prices rise? I still don’t understand how consumer spending is bad.
And isn’t most of the elevated inflation calculation from auto insurance and 18-month lagging home prices? I don’t want the Fed to base monetary policy on soaring insurance premiums.