Chair Powell presents the Monetary Policy Report to the Senate Committee on Banking, Housing, and Urban Affairs, February 12, 2020.
In The Financial Times, Mohamed El-Erian discusses the inflation dangers facing markets today and the Fed’s strange response to the evidence before it. He writes (abridged):
According to an old saw, the difference between lawyers and many other professions is that the former can argue with 100 per cent conviction even when the foundation for their view is uncertain or low.
The US Federal Reserve these days seems to be acting more like a lawyer than an economist. Once again, it has set aside accumulating evidence about the strong economic recovery, dismissed financial stability concerns, and reiterated that the rise in inflation would be transitory.
By contrast, many economists are either unsure, or outright worried about inflation being persistent. Indications of market froth are multiplying in an “everything rally.” More companies are warning about rising input costs, with some signalling that this will be passed on to prices.
The contrast between the Fed stance and all this is why policy risk has climbed up the ranks to be one of the major challenges that investors will be navigating this year. The argument for keeping an open mind towards the nature of rising inflation is not one that dismisses the structural disinflationary effects of technology.
Nor does it deny that the initial jump in the inflation data has a lot to do with base effects and a temporary mistiming between additional spending and production. Instead, it draws on structural changes that have an impact on both the demand and supply sides of the economy.
The deficiency of aggregate demand that long dogged the US economy appears over. The Biden administration is keen to maintain its “go big” fiscal policy pivot and the private sector is able — and now more willing — to consume more from the private savings accumulated during the pandemic.
All this is supplemented by a general shift in economic policy away from coddling the corporate sector and the well-off to a more inclusive approach favouring those with a propensity to spend a bigger portion of their income on goods and services.
The resulting surge in demand is coming at a time when years of under investment have made the supply response less dynamic. Already — and it’s still early — companies are dealing with supply chain bottlenecks, higher commodity prices, industrial concentration, pervasive inventory shortfalls and, in some cases, labour issues.
Read more here.
