Powell’s Pledge: High Inflation Won’t Define American Life

“Our tools cannot ease supply constraints,” Jerome Powell said Wednesday, following the November FOMC meeting, during which the Fed unveiled a plan to begin paring asset purchases starting later this month.

“Our dynamic economy will adjust to supply-demand imbalances,” he said, hopeful, while conceding that it’s “very difficult to predict” when various frictions will ease. “Global supply chains,” he remarked, “are complex.”

That they are. And, as discussed here at length in “‘It’s Come To This’: Beyond The Great Supply Chain Crisis,” we’re getting a taste of what rapid deglobalization actually entails, courtesy of the pandemic. This is why so many people, not all of them partisans, warned against the haphazard dismantling of globalization during the Trump years. It’s disruptive, inflationary and conducive to supply chain crises not easily resolved.

Powell stuck to standard talking points in his prepared remarks, although the script was modified slightly. Now, the Fed is openly conceding that inflation will persist into 2022 and that they have very limited visibility into when the pandemic-related distortions bedeviling supply chains will ease.

That said, Powell emphasized that one way or another, distortions brought about by the virus are the proximate cause of price pressures. “Production is not able to respond to demand spikes in [the] near-term,” he said. “It remains the case that the drivers of higher inflation [are] predominately the result of the pandemic.”

Of course, everything in the macro universe right now is “predominately the result of the pandemic,” including monetary policy which is itself contributing to inflation — just ask housing prices. So, it’s not quite as simple as pointing to disrupted supply chains. But Powell is mostly correct.

On the labor market, he emphasized the participation rate, noting that it’s not all about retirements. “Participation for prime age individuals remains low,” he lamented, citing care-giving needs and ongoing concerns about the virus.

During the Q&A, Nick Timiraos wasted no time asking the question on everyone’s mind. “Are markets wrong?”, he wondered, referencing expectations for rate hikes as soon as the taper winds down.

That was Powell’s chance. He could have channeled Christine Lagarde who, earlier Wednesday, said the ECB has “clearly articulated the three conditions that need to be satisfied before rates will start to rise.” Those conditions “are very unlikely to be satisfied next year,” she emphasized.

By contrast, Powell mustered a convoluted rejoinder. “I would say it this way: We try to focus on what we can control,” he ventured, before taking a needlessly circuitous route to conclude that “We can be patient.” If conditions call for a response, the Fed “won’t hesitate,” he told Timiraos. “Policy will adapt appropriately.”

Asked by a different reporter to specify the conditions that would warrant an accelerated taper, Powell flatly refused. He referenced the statement language and said, “I’m not going to give you a lot more detail.”

Pressed, he didn’t budge. “We are prepared to speed up or slow down the pace,” he said. “We wouldn’t want to surprise markets. We’ll be transparent. I’m not going to start making up examples.”

Someone from The New York Times asked about wage growth, and specifically whether it’s a good thing. “Are you thinking about a wage-price spiral?”, the reporter wondered.

Powell cited the third quarter ECI data, but noted that in real terms, wage growth is “close to zero.” “We don’t have evidence of [a wage-price spiral] yet,” he contended. “The ECI reading is just one reading. I would say that at this point, we don’t see troubling increases in wages.”

Steve Liesman asked if the Fed should consider leaving the five million people who had a job before the pandemic but don’t have one now, behind, in the interest of fighting inflation. In other words, Liesman wanted to know if Americans are sacrificing too much on the inflation front in order to get those five million people back to work.

Powell wasn’t particularly amused with that line of inquiry. “We have to make policy in a world where [our] goals are in tension,” he said. “It boils down to common sense and risk management.”

The most interesting exchange came when a reporter from the Washington Post asked what the Fed’s message is to families who might be struggling with higher prices at the grocery store and at the pump.

Powell took the opportunity to explain the tweaked statement language around inflation, but also to take responsibility.

“It is our job. We accept accountability for inflation in the medium term,” he said, bluntly, adding that “the level of inflation that we have right now is not at all consistent with price stability.”

That should be applauded as an example of a Fed Chair being refreshingly candid. But it won’t be — applauded, I mean. Fed critics will just find something else to bemoan.

Powell proceeded to elaborate on how the Fed thinks about the term “transitory,” which Raphael Bostic recently characterized as “a dirty word.”

“‘Transitory’ is a word that people have had different understandings of,” Powell remarked. “Really for us what ‘transitory’ has meant is that it won’t leave behind permanently high inflation.”

“We understand completely” what people are going through, he insisted, promising that under no circumstances would the Fed permit high inflation to “become a permanent feature of life” in America.