General Powell

General Powell

Liftoff is finally here, and it'd be difficult to conjure a more challenging set of circumstances for Jerome Powell and his merry band of compatriots. For the better part of two years, Fed officials were implicitly (and, in many cases, explicitly) asked to deliver authoritative opinions on matters of virology and epidemiology, a ridiculous ask that Powell nevertheless obliged more often than he probably should've. Now, he'll need to ditch the lab coat and microscope prop for combat fatigues and
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7 thoughts on “General Powell

  1. Powell and many of the Fed Governors must feel like a doctor in 1885 who knows that bleeding is not a cure for smallpox but is forced by the patient’s family to use it.

    But just as then, others will not accept what they were taught is wrong: “Nurse! Bring in the jar of leaches!”

    1. So I really want to discuss that.

      “The Fed [that] was already destined for a policy “mistake,” where the scare quotes are there to suggest that although policymakers are all but certain to find themselves tightening into, and thereby exacerbating, a slowdown, it’s hard to call that a mistake considering the inflation backdrop”.

      My understanding is that stagflations are relatively rare and generally due to unusual supply constraints. Here, today, I think most of us think the inflation we got was due to a demand shock – the excess savings of the COVID years (made worse by some composition issues and supply constraints in some specific items like semiconductors).

      If demand cools down b/c excess savings are gone and wage gains have dissipated/melted away due to past/present inflation, what would sustain inflation (and drive the Fed to hike 7 times this year) for the remaining of the year?

      Now that was my thinking pre-war. I understand war makes oil prices go up/make inflation more persistent i.e. it’s a proper supply shock.

      But it’s still true that I don’t get what is to be gained by raising rates in a stagflation environment. Higher rates won’t cure supply shocks. Unless the intent is to cause a recession to lead to such demand destruction that the reduced supply no longer affect prices. And I mean, ok, though that’ll be a bitch to sell to the poor suckers whose jobs and lives got to be destroyed for the sake of fighting inflation.

      Seems to me it’d be better to force corporations to take a margin hit – i.e. force them not to pass along rising input prices. Appeal to their patriotism and if that doesn’t work (smirk), threaten them with special confiscatory taxes.

      1. You answered your own question. Higher rates push purchasing power down for anyone who needs to borrow: companies and individuals at the margin of profitability.

        The alternative you’re suggesting is a form of public overtake of private enterprise. Despite all the criticism of big-whatever, I would rather politicians not make decisions on the day-to-day workings of production.

        The best tool the government has to improve this situation is spending more to incentivize production/competition in the areas that are the source of inflation: food, housing, fuel. Yeah, we’re screwed when those three are suffering supply shocks and climate change is impacting two of those exponentially harder by the season.

        Without demand destruction, money would become meaningless. We’re in for a pretty rough landing.

        1. Thanks for engaging.

          I’ll note that the Fed certainly doesn’t advertise wanting a recession… 🙂

          Don’t get me wrong on the ‘solution’ – I think we should have thought of abundance sooner (Germany willingly surrounding its energetic autonomy to Russian gas is something we knew was problematic since 2014 at least) and I think we should push hard there (with renewables now cheaper than fossil fuels, a lot can be done to speed up infrastructure building) and I’m with you to encourage competition and alternatives etc.

          But that’s medium and long term. Someone got to take a hit for higher input costs right now. Either the consumers via higher prices, the companies via lower margins, the workers via lower wages or the government via lower taxes. Split it out if you can. But there is no law of nature that says higher input prices must lead to higher consumer prices. It’s a human decision and we need to make the smart one(s), as opposed to what happened in ’73 ’74 and ’79.

  2. Raising rates on one hand is a policy mistake, on the other hand it’s a cutting edge tool that can be used to supercharge Russian sanctions that linked to China debt and collateral, which connects to pegged international exchange rates and interest payment dynamics.

    However, I also agree that a jar of leaches probably provides similar results.

    “The authors of the report find that 42 countries now have levels of public debt exposure to China in excess of 10% of GDP. They also find that these debts are systematically underreported to the World Bank’s Debtor Reporting System…”

  3. “Extreme volatility in Treasurys is a total non-starter at the Fed.“

    Didn’t Zoltan say the fed should give no guidance and sell 50 billion in 10yr the next day? Wasn’t the explicit point of that to promote volatility in treasuries?

    1. “The Federal Reserve is trapped between the possibility of provoking a taper tantrum or an inflation tantrum,” Spinozzi said. “Either way, the market is going to remain volatile and if the Fed disappoints, either way, a selloff is likely to ensue.”

      Or not…

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