Adults In The Room

The Fed delivered a predictably bland, albeit relatively upbeat, statement following an April meeting that I generally described as a placeholder.

The economic assessment reflected what everyone knows — namely that the prospects for the world’s largest economy have improved considerably and that further progress is heavily dependent on the evolution of vaccinations and the pandemic.

“Indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement,” the Fed said. “The ongoing public health crisis continues to weigh on the economy, and risks to the economic outlook remain.”

Although the labor market is still 8.4 million jobs short of pre-pandemic levels of employment (figure below), this year’s gains have been impressive. And they’re likely to continue. At least for another few months.

Inflation is a hot topic — figuratively and literally. Prices paid gauges on PMIs are off the charts and breakevens are perched near decade highs.

CPI rose the most MoM since 2012 in March (figure below) and pandemic distortions will throw the debate into stark relief in the coming months.

Policymakers are supposed to be the proverbial “adults in the room,” calming tantrums emanating both from the bond market and from commentators who warn that price spikes won’t be “transitory.”

“Inflation has risen, largely reflecting transitory factors,” the Fed said Wednesday.

If they’re wrong and inflation pressures don’t prove transitory, the adults will be seen, in hindsight, as unprepared and hapless. Just as all adults are at some point. And just as the adults were during the pandemic.

A year ago, at a virtual commencement address, Barack Obama said the following:

More than anything, this pandemic has fully, finally torn back the curtain on the idea that so many of the folks in charge know what they’re doing. A lot of them aren’t even pretending to be in charge.

The Fed is at least pretending. The question is whether the act is sustainable. The Fed is, in more respects than one, the Wizard of Oz. Or the naked Emperor.

Too many readers misconstrue my Fed analysis as a defense. Or an apology tour. It’s neither. Rather, it’s a contention (or an expression of hope) that even if central bankers are hubris personified, they’re not evil incarnate.

Most of them are trying to do the “right” thing. They just don’t seem to know what that is once the immediate, acute phase of a crisis is over. They know how to ease a dollar funding squeeze and ensure the ATMs don’t go dark, for example. After that, though, it gets a bit murky. Moral hazard abounds. As do critics.

Now, under Powell, the Fed at least seems earnest and has demonstrated a willingness to publicly identify a few key problems The emphasis on “publicly” is crucial. Contrary to popular belief, the Fed isn’t comprised of idiots. Or at least not if by “idiots” you mean people whose analytical faculties are impaired. They’re fully (or mostly, anyway) aware of the consequences of their policy prescriptions. If you doubt that, spend a few hours reading the meeting transcripts. They’re available to the public.

The Fed recognizes moral hazard. They understand they’ve played a role in perpetuating inequality and encouraging speculative excess. They just don’t want to stoke a furious public debate. That debate already rages in market circles. The last thing they want is for it to go mainstream, undermining the country’s faith in the central bank.

Remember: Dollars, and money in general, rely solely on a shared mythology for their legitimacy. The imagined order we call “dollar hegemony” is one of the most powerful intersubjective realities the world has ever known. But as Bitcoin has shown, it’s not invulnerable.

All “Fed Listens” events notwithstanding, some element of the Oz fairy tale has to remain in place. Otherwise, the myth could be in jeopardy. And waking up in Kansas probably wouldn’t be a very pleasant experience for most people. Part of preserving the myth entails insisting that the Fed serves a critical purpose and that policymakers are working to fulfill a mandate handed down from elected officials and that the pursuit of that mandate is always done with the public interest in mind. And so on, and so forth.

Sometimes, that turns out to be mostly true, if only by happenstance. But the best laid plans often go awry. What the Fed did to exacerbate inequality post-financial crisis will likely be remembered as a monumental failure that helped destabilize American society and calcified the opinions of already disaffected voters inclined to blame the “establishment” for their worsening plight in a globalized world. That, in turn, helped pave the way for America’s harrowing lurch towards right-wing populism and what very nearly became authoritarian rule.

Try as they might, Powell and the “new” Fed are at least as likely as not to do more harm than good going forward. In my judgement, though, their efforts are at least a semblance of earnest now. And that’s a helluva lot more than you can say for most of America’s politicians.

Full April Fed statement

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Amid progress on vaccinations and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on the economy, and risks to the economic outlook remain.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation running persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer?term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. In addition, the Federal Reserve will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage?backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K. Quarles; and Christopher J. Waller.

Redline

The COVID-19 pandemic is causing tremendous human and economic hardship across the United States and around the world. Amid progress on vaccinations and strong policy support Following a moderation in the pace of the recovery, indicators of economic activity and employment have strengthened. The turned up recently, although the sectors most adversely affected by the pandemic remain weak but have shown improvement. Inflation has risen, largely reflecting transitory factors continues to run below 2 percent. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The path of the economy will depend significantly on the course of the virus, including progress on vaccinations. The ongoing public health crisis continues to weigh on the economy economic activity, employment, and inflation, and poses considerable risks to the economic outlook remain.

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