Tight Lipped Powell
In day two of Congressional testimony, Powell was Tight-Lipped on Bank Dividends and Leverage.
- Federal Reserve Chairman Jerome Powell deflected lawmakers’ questions on two items that are at the top of Wall Street’s wish list: whether the Fed will drop restrictions on bank dividends and if it will keep giving lenders a break on capital demands due to Covid-19.
- In back-to-back hearings in the Senate yesterday and House today, Powell refused to budge in the face of repeated queries — mostly from Republicans — about temporary measures the Fed implemented to strengthen the financial system during the pandemic.
- Powell offered similar versions of the same quote, “That’s something that’s under consideration right now.” Basically saying: You’ll know the answer when we tell everybody else.
What About Jobs?
What About Overheating and Inflation?
Yesterday and today, Powell Pushed Back on Concerns of Prices Rising, Overheating.
“Our policy is accommodative because unemployment is high and the labor market is far from maximum employment,” he told the House Financial Services Committee on Wednesday, in his second day of testimony to Congress. “It’s true that some asset prices are elevated by some measures.”
Powell pointed to the example of car prices rising because of a chip shortage and supply-chain constraints in the tech industry.
“That doesn’t necessarily lead to inflation because inflation is a process that repeats itself year over year over year,” he said, rather than a one-time surge.
In multiple questions from lawmakers about the risk of the economy overheating — with additional government aid and continued support from the central bank — the Fed chair reiterated his view that there’s a long way still to go before returning to pre-pandemic strength.
During the hearing, Powell voiced confidence that the Fed would succeed in lifting inflation and getting it to average 2% over time.
“I’m confident that we can and that we will, and we are committed to using our tools to achieving that,” he said. “We live in a time where there is significant disinflationary pressures around the world and where essentially all major advanced economy’s central banks have struggled to get to 2%. We believe we can do it, we believe we will do it.”
Powell said that “it may take more than three years” to reach that goal but vowed to update the Fed’s assessment on the issue every quarter.
Market Soothing Talk
If the Fed had a clue, it would recognize economic bubbles as a sigh of inflation.
If you expected Powell would be different than all the group-think Chairs who preceded him, you thought wrong.
Yesterday, I noted The Fed Soothes the Market Today With More Easy Money Talk
Powell repeated the same message today and the DOW closed at another all-time high.
How Long Can This Go On?
Note the Very Unusual Move in Mortgage Rates vs the 10-Year US Treasury Yield in which mortgage rates ought to be 75 to 100 basis points higher than they are.
The Fed via QE asset purchases is doing a far better job manipulating mortgage yields lower than it has done controlling yields on long-term treasuries.
My question on February 14 still stands: How Long Before the Fed Tries to Manipulate Long-Term Rates Lower?
Mish
Jay and Janet ….. Two oligarchic Frankensteins – maybe it’s time to break out the pitchforks and torches for these two predators……
Jay should take his personal $50 million plus , and Janet her $14 million plus- and join their buddies in New Zealand.
Just leave, will you ?
Is the post-COVID boom going to bust? link to macrobusiness.com.au
The FED will always say inflation is under control. And their policies are working.
Powell asserted that the FED has ample time “as inflation dynamics do not change on a dime.”
To the Fed chairman, I say this: YOU ARE WRONG FOR THE GLOBAL DYNAMICS ARE CHANGING. All the world’s central banks failed to achieve the coveted 2% inflation target because the Chinese were busy EXPORTING DEFLATION AROUND THE GLOBE. On January 1, 1994, the Chinese DEPRECIATED the YUAN by 50%, to 8.7 from 5.8 to the U.S. DOLLAR. The power of the Chinese labor force was unleashed to export to the world. Foreign money rushed in to China and along with the ASIAN TIGER growth excess capacity sent global prices into a tailspin.
This is what the FED and its beloved PHILLIPS CURVE failed to comprehend for the model was based upon domestic data.
The stock markets are awesome. The last 11 years have really benefited people who have aggressive portfolios. Truly amazing.
Then add in cryptos too.
Wow
… so far.
You can tell what central banks are reacting to by what they want to influence. Powell’s response to the deflationary clearing of debt, is to want higher inflation without higher rates. So I imagine from now on Powell will start to make more and more soothing comfort about “transitory factors”.
Volcker for example, certainly -did not beat inflation- (although you might think he did from the press) because he didn’t restore a historical 2% inflation rate. What Volcker did was preside over an organised devaluation of the dollar because you never get back the debasement of the 10%+ inflation years. Yes he didn’t let the dollar collapse to zero would be a better assessment. He reined in the horse but he didn’t bring it back to the stable.
From Powells point of view (or anybodies for that matter), would a devaluation of the dollar solve a lot of problems and I think the answer is yes. I would also point out that there is a lot of room for the dollar to safely go to. I know i said this before, but the dollar has been as low as 2.10 against gbp and it wasn’t even all that dramatic. American holidays were cheaper, US exports were cheaper, nobody I saw at the time (2007) was burning dollars to keep warm.
Electronic money is infinite.
it is all trump fault. Period.
Cluelessness abounds:
they just call it “operational error”.
Title: “The Federal Reserve suffers widespread disruption to payment services”
Obviously, I didn’t know the title would show up MINUTES later in the original post.
And apparently editing/deleting is no longer an option.
Stupid.
And still, after all of these years of hearings, not one politician is willing to ask the most basic and fundamental question: why is 2% inflation a good thing? Please let us all know. Whoever asks that question and demands a straight answer will be a patriot and a hero, in my eyes.
If you had all the money in the world…and you were a bank and you lent me the whole wad….and I paid it back on time in payments with interest, where would the money come from to pay the interest, without increasing the money supply over time?
So debt based money, by definition, requires inflation to avoid collapse.
Could we all agree on that? Is that a reasonable assumption? If not, why not?
If we can agree on that much, it just becomes an argument about how much is enough and how much is too much, and how much is too little.
The US government borrowed a lot of money to pay for WWI…..and in 1917 the inflation rate nearly hit 20%….that seemed to be too high….it caused a lot of problems. Wage earners went bankrupt and pensioners couldn’t buy food. Stuff like that.
In 1932, during the worst of the Great Depression, the inflation rate was a negative 10%…..10 percent DEFLATION and that seemed to be too low….it caused a lot of problems. Runs on the banks. Massive destruction of value.
So empirically one might come to the conclusion that the inflation rate should be less than 20% and greater than -10%.
In general people complain more when the nominal value of their hard won assets is FALLING and less when they’re rising….so you could make the argument from that that….that maybe inflation should be at least higher than zero.
So…what I really think is that we’ve seen when inflation gets close to zero that people fear (and therefore perhaps do things unwittingly to cause) deflationary events…by hoarding and paying down debt.
And we know from experience that if inflation is steadily rising it has a way of also getting out of control, as people make poor decisions about how to allocate capital….speculation on risk assets goes hog wild.
So how about a nice little tame amount of inflation that doesn’t scare anybody……or make them inclined to bet the farm on the future price of chinchilla furs or tulips or……bitcoin?
2% sounds good. If you miss the target at least maybe you stay in positive territory. If you overshoot it a little, well 3% is not terrible.
It would be great…except what we can see, I think, is that not all asset prices move in lockstep. You can have less than 2% CPI…and 11% inflation in housing in Austin Texas…..at the very same time.
Q: “…where would the money come from to pay the interest, without increasing the money supply over time?”
A: Velocity. (The same money can be lent out and paid back over and over again. The total created does not necessarily ever have to equal the total amount that changes hands over time.)
Also, when the Fed says 2% “inflation” they do not mean a 2% increase in the money supply, which appears to be part of what you are describing. The Fed means a 2% or greater reduction in the purchasing power of money year after year, as measured by their specific method, including hedonic adjustments. In other words, they will take 50% of every person’s purchasing power in 35 years or less and PLUS every dime of improvement in standard of living that would have occurred due to better productivity and quality.
Their policy is an inflation tax levied upon savers to prevent the big over-leveraged debtors from collapsing, plain and simple. The biggest over-leveraged debtor benefiting from this is the US Government. In the long run, this policy is going to severely harm US economic growth and dynamism. No country ever successfully borrowed their way to prosperity in the long term. The Fed tells people this is short-term policy, but since there is no credible exit plan, I have to conclude that it will be with us for the long term.
Thanks for the thoughtful insights. I agree about the tax part…absolutely.
Q: “…where would the money come from to pay the interest, without increasing the money supply over time?”
Would it be possible to print some money and not have price inflation?
“Would it be possible to print some money and not have price inflation?”
As in all things: it depends. Suppose I own a factory that produces very popular widgets. Everybody wants at least one. I’ve settled on the idea that I should charge $10 for each one, because that figure maximizes my profit while simultaneously doesn’t lead to people thinking the prices is too high and spending their money elsewhere (demand destruction). And, my factory isn’t running at full capacity. Meaning I could easily double production if the demand was there.
Now the government steps in and starts printing money, and putting it in the pockets of regular folks who really want one of my widgets. What do I do? Raise prices or produce more? Well, I don’t want to raise prices because once raised, they’re hard to lower (people get pissed when they find they could have gotten a lower price). So instead, I hire a few more employees and increase production.
Moral of the story? Printing money may lead to increased production if, and only if, you have excess capacity in areas that have high demand.
The only ideal inflation is to not sponsor any at all.
2% is patently absurd
It was just a hypothetical meant to create discussion. 🙂 🙂
Inflation occurs when too much money chases too few goods/services. If the economy consists of 1 billion in goods and 1 billion in dollars then each good costs $1. If the goods and money supply both double to 2 billion there is no inflation because each good still costs 1 dollar. So as long as the economy grows at the same rate as the money supply everything is fine. Right now (well for a long time) the Fed is expanding the money supply (and credit) wildly compared to how sluggish the economy is growing so inflation is really heating up (in some sectors more than others).
Note that even on a gold standard there were times of inflation. Spain in the 15 and 16 hundreds had this happen when they were looting gold/silver from the new world and vastly increasing their money supply but were hardly adding any new goods/services to their economy so all their gold/silver was buying far less than it did before.
Thank you for the cogent reply.
Very good analysis of the utility of moderate inflation Eddie.
anyone knowledgeable knows the answer is obviously 46
Are you saying Douglas Adams was wrong?