Star-Crossed Powell Confronts War, Commodity Crisis

Jerome Powell expects it’ll still be appropriate for the Fed to hike rates this month, he told Congress on Wednesday.

Notwithstanding a long, lucrative career and his fortuitous economic circumstances, Powell must believe himself to be one of the unluckiest people alive. At the least, his tenure as Chair will be remembered as star-crossed.

Since taking the reins from Janet Yellen in 2018, Powell has suffered through,

1. The implosion of the VIX ETP complex (on his very first day as Chair),
2. A trade war between the world’s two largest economies,
3. Unceasing public derision from the (former) President of the United States,
4. A mini-bear market followed by the longest government shutdown in US history,
5. A funding market snafu that nearly morphed into a baby crisis,
6. A pandemic,
7. A depression,
8. The highest inflation in a generation,
9. An energy crunch,
10. And, now, a war in eastern Europe that threatens to turn both the inflation and energy problems into full-on crises

It’s also possible that the Russian financial system and economy will implode over the next several months, something he’ll have to somehow fix and perpetuate at the same time, due to his dual roles as guardian of the financial universe and good American patriot, respectively.

Through it all, he’s still standing. Ready to endure a second term that was already off to a wholly inauspicious start before it was even official.

Powell on Wednesday emphasized the inflation fight in his prepared remarks on Capitol Hill. “We understand that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing and transportation,” he said. “We know that the best thing we can do to support a strong labor market is to promote a long expansion, and that is only possible in an environment of price stability.”

So, clearly, the price stability part of the mandate is no longer playing second fiddle. Although Powell reiterated the notion that inflation will likely abate later this year, he said the Committee “is attentive to the risks of potential further upward pressure on inflation expectations and inflation itself from a number of factors.”

One of those factors is the conflict in Ukraine and the read-through for commodity prices, which are hitting new records all over the place, to speak colloquially. The figure (below) is straightforward.

As Bloomberg noted, “Rusal is the biggest aluminum producer outside of China and MMC Norilsk Nickel accounts for about 10% of refined nickel.”

Meanwhile, wheat futures are above $10 a bushel (figure below). That hasn’t happened in at least 10 years. A separate article published Tuesday documenting surging grain prices dryly noted that “Ukrainian farmers appear unlikely to plant spring crops as usual” given that many of them are too busy fighting the Russian military.

An underappreciated problem with this for policymakers is that any accompanying rise in breakevens pushes real rates down, at cross purposes with efforts to tighten policy.

“As DM breakevens have continued pushing higher alongside gapping commodities, the stunning move lower / more negative in real yields has perversely only increased the need for hiking, as central banks’ already brutal inflation problem is set to go exponential,” Nomura’s Charlie McElligott wrote Wednesday. “With real yields collapsing more negative, financial conditions are actually easing, which is a disaster for [policymakers] attempting to rein in accelerating price pressures,” he added.

In his Wednesday remarks, Powell attempted to don a political scientist hat, just as he was forced to play virologist for the better part of two years. “The near-term effects on the US economy of the invasion of Ukraine, the ongoing war, the sanctions and of events to come, remain highly uncertain,” he told lawmakers.