In the 24 hours following the release of January’s inflation data, I’ve been adamant about the necessity of the Fed commencing rate hikes as soon as absolutely possible.
The reason, as I attempted to communicate here on Friday morning, is the heightened risk of a rapid deterioration in confidence.
I won’t mince words, but I’ll try to couch this in apolitical terms: The last administration wittingly perpetuated distrust in government institutions, often leveraging conspiratorial narratives for political gain. There’s nothing “biased” about that statement. It’s a fact. You might argue that people shouldn’t trust their government or even that some conspiracy theories have merit, but you can’t argue that the Trump White House didn’t leverage distrust. It did. That’s what “drain the swamp” meant.
By and large, the Fed didn’t suffer as much from those efforts as other institutions (like Congress and the courts), but it wasn’t because the former president spared Jerome Powell. Indeed, Powell was a veritable piñata. What saved the Fed from the kind of public scorn the presidential Twitter feed successfully brought upon rivals, real and imagined, was the public’s generalized disinterest in monetary policy. Everyday people just didn’t care all that much.
Depending on which of two parallel universes you inhabit, Trump is no longer president. But the distrust he perpetuated is, if anything, even more pervasive now than it was two or three years ago. The public doesn’t know much about quantitative easing or the Wu-Xia shadow rate, but they know how much gas costs. In short, the FOMC risks becoming the latest scapegoat for the country’s multiplying problems, a perilous situation considering what it is the Fed ultimately represents.
It’s very dangerous when the rule of law comes under siege, as it has in America over the past five years. And the fact that the legislature barely functions is a sign of institutional decay. But loss of confidence in the Fed would be tantamount to loss of confidence in the currency. If that goes, the whole thing falls apart. In a hurry.
Underscoring some of the above (albeit certainly not in the same terms), was Nomura’s Rob Dent.
“We think one underappreciated aspect of yesterday’s surprise CPI numbers is their potential to worsen the national conversation around inflation,” he said Friday, adding that,
The press widely covered the upside surprise, and Google search activity suggests the general public also showed keen interest. Moreover, significant increases in prices have become correlated with the percent of consumers reporting hearing bad news about higher prices in the University of Michigan survey.
That survey, you’ll note, printed a new decade low in the preliminary reading for February. The survey’s chief economist, Richard Curtin, called the monthly drop “stunning.”
The final read for this month could be considerably worse. As Nomura went on to say,
Today’s UMich numbers are not going to reflect the upside CPI surprise (the survey period for today’s numbers is 26 Jan – 9 Feb, ending one day before the CPI report). However, the final February print and early March numbers could show further upward pressure on consumer inflation expectations, which have already risen sharply during the pandemic, increasing pressure on the Fed to remain hawkish.
This is all very bad. And it’s not clear, to me anyway, that the majority of market participants appreciate the risks, likely because investors are, almost by definition, well-off and thereby more insulated from the myriad unpleasantries that define daily life for “real” people.
“The Fed is increasingly concerned about regaining narrative control around inflation,” Dent went on to say.
His colleague, Charlie McElligott, wrote that “as it stands now,” the Fed likely needs to take what the market is giving them regarding pricing for a 50bps move at the March meeting. “Anything otherwise would not just shock markets in the other direction, but would also undermine their credibility as inflation fighters in this now massively politicized issue that’s taxing all Americans and has the Fed in the crosshairs from all parties,” he added.
Relatedly (and to another point I made on Friday morning), note that if the Fed fails to control inflation, there’s a non-zero chance their independence gets called into question by some enterprising lawmakers. After all, the whole point of Fed independence is to ensure policymakers are free to pursue the best course of action to meet their mandate. If they’re not meeting their mandate and it can be plausibly argued that they aren’t even trying, it’s a small step for ambitious, power-hungry politicians to float the idea of “temporarily” revoking their independence, ostensibly in the name of restoring trust in the currency. Of course, such an affront would have the exact opposite effect.
The trouble is that interest rates don’t reduce inflation until they get so high that they choke the economy and unemployment causes demand destruction. If interest rates were such a sharp tool, Brazil, Turkey, Russia, and Venezuela would have inflation under control…and Japan would not have spent more than a decade trying to get 2% inflation with negative rates.
Perhaps Biden and his economic team should withdraw Powell’s renomination: I don’t know if that’s possible at this point.
Who then? Powell doesn’t make these decisions alone, they are made by the entire FOMC.
the move would be largely for political reasons that the masses would understand in this crucially important election year…Trump appointed Powell, Powell’s politics (along with FOMC) have contributed to current inflationary period, Powell must be replaced due to these policy failures…
I completely understand our group understands the nuance and complexities far greater than the masses outside of us…
I don’t know about this….
I agree that there’s a pubic trust deficit, but I don’t think the path to regaining that trust is by raising rates solely to meet the public perception of what must be done (the same public that apparently doesn’t know anything about the economy). As you said earlier, what’s the public’s perception of the Fed going to be if it tightens into a slowdown with predictable results?
I don’t think you can build trust by reacting to public perception, that’s what politicians do, and ask yourself how much the public trusts them.
I think the real problem is the lack of leadership at the white house outlining a clear economic path out of this that isn’t “help, jerome, you’re my only hope.” There are definitely theories out there that would allow Biden to tie the path to price normalization to specific policy goals (even some requiring nothing but his own pen), which would at least give his party something aspirational to run on in the midterms. But right now, he’s just playing the republican’s game, which i suppose isn’t a surprise given his priors. But it does mean that the public has no alternative narrative — and Biden can’t be a better republican than a republican… which seems informative for the midterms.
“I think the real problem is the lack of leadership at the white house outlining a clear economic path out of this”
Since the biggest problem underlying our current situation is the global pandemic, I think the white house, along with other responsible leaders of both Federal and State governments, has been very clear: get vaccinated and wear a mask.
These are the best mechanisms for getting the pandemic under control which would then allow the global economy to rebuild and start functioning efficiently again. Rebellion against these policies is prolonging the pain.
It’s not clear what else you expect “the white house” (one guy?) to do
Talk about things turning on a dime….
H. One of your best posts this year. That last paragraph is among your scariest. Too many people want to turn us into Turkey. I’ve got a pal there and it’s just not a nice place.
Policy works with long and variable lags
Looks grim indeed, panic started to spread like a new Covid variant, sadly a lot of the current paths I can envision lead to a Trump return in 2024, either propelled by raging inflation or by the economic recession after an aggressive Fed hiking cycle. I personally will not live through that again so my USexit plans are well underway, hopefully they remain that, just plans.