Has The Taper Been Tabled?

A funny thing happened on the way to the taper, the U.S. jobs market hit a brick wall.

Last week’s underwhelming jobs report for August, which showed the U.S. economy adding only 235,000 jobs—less than a third of the consensus estimate of 740,000 and down sharply from July’s upwardly revised total of 1.05 million, may have put the kibosh on the Federal Reserve’s prospective plan to start reducing its $120 billion a month purchases of government and mortgage securities.

Last month, you’ll remember, Fed chair Jerome Powell, in his Jackson Hole speech, seemed to have joined the bandwagon started by his central bank colleagues calling for the Fed to start the tapering process soon. “If the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year,” he said. However, he also provided this caveat: “Today, with substantial slack remaining in the labor market and the pandemic continuing, such a mistake could be particularly harmful.”

Friday’s job report could have provided enough of a reason not to taper, or at least put it on hold. Particularly discouraging was the net no new jobs in the leisure and hospitality industry after adding 350,000 jobs a month over the prior six months, including a net loss of 42,000 jobs in bars and restaurants. Continue reading "Has The Taper Been Tabled?"

Powell Tempers The Taper Talk

Federal Reserve Chair Jerome Powell’s comments at last Friday’s virtual Jackson Hole Economic Symposium received different interpretations from the financial media, but the bond and stock markets seemed to understand that the Fed isn’t going to be embarking on any significant change in its accommodative policies in the near future; i.e., don’t worry about the taper.

According to the Wall Street Journal’s headline, “Powell Says Fed Could Start Scaling Back Stimulus This Year.” But Yahoo Finance had a much more circumspect take. Its headline read: “Powell: Reversing Fed stimulus too early could be 'particularly harmful.’”

“Today, with substantial slack remaining in the labor market and the pandemic continuing, such a mistake could be particularly harmful,” Yahoo quoted Powell as saying, although further down in its story, it added an additional quote: “If the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year.”

As several other Fed officials stated, that seemed to seal the deal that the Fed will start the asset tapering process sometime in the fourth quarter and maybe wrap it up early next year. Left up in the air is exactly how much the Fed plans to taper and at what point it will stop, although Powell made it sound like it may not happen at all if economic changes intervene. In any event, the markets seemed to like what Powell said, as stock prices rose and bond yields fell. Continue reading "Powell Tempers The Taper Talk"

Does Inflation Matter?

The Great Inflation Debate continues.

Senator Joe Manchin, the West Virginia Democrat, became if not the first, but certainly the most prominent politician to sound the alarm about rising inflation and the Federal Reserve’s role in it.

“With the recession over and our strong economic recovery well underway, I am increasingly alarmed that the Fed continues to inject record amounts of stimulus into our economy by continuing an emergency level of quantitative easing (QE) with asset purchases of $120 billion per month of Treasury securities and mortgage-backed securities,” the senator wrote in a letter to Fed Chair Jerome Powell.

This “has led to the most inflation momentum in 30 years, and our economy has not even fully reopened yet. I am deeply concerned that the continuing stimulus put forth by the Fed and proposal for additional fiscal stimulus will lead to our economy overheating and to unavoidable inflation taxes that hard-working Americans cannot afford. Therefore, I urge you and the other members of the Federal Open Market Committee to immediately reassess our nation’s stance of monetary policy and begin to taper your emergency stimulus-response.”

Needless to say, as the Wall Street Journal pointed at, that concern hasn’t prevented Manchin from voting with his party to spend trillions more and add trillions more to the federal deficit.
(By the way, did you hear any criticism of Manchin for trying to “politicize” the Fed? No, me neither).

A few days later, we received the latest indication that inflation may not be as transitory as Powell and many others Continue reading "Does Inflation Matter?"

Looking Past Powell

Jerome Powell's term as chair of the Federal Reserve doesn't end until next February, but the handicapping of his reappointment has already begun. A recent poll by the Wall Street Journal found that three-quarters of economists it surveyed believe Powell will be renominated by President Biden, but I would argue that the odds are at best 50-50, if not lower.

Powell has unquestionably been friendly to the financial markets, which counts in his favor on Wall Street, but that may be a detriment when it comes to the progressives who are likely to have the biggest voice in choosing the next Fed chair. Right off the bat, Powell checks off none of the boxes that progressives are looking for, and as he has shown since his inauguration, Biden almost never goes against what they want.

Let’s look at Powell’s negatives: He's a white male. He's a Republican. He comes from Wall Street. He's rich (although most people at this level are). Let's also not forget that Powell was nominated to his position by President Trump, which automatically disqualifies him in the eyes of many, never mind the constant barrage of criticism Trump leveled at him once he was seated.

Just the taint of being associated with the former president should be enough to make him unsuitable for another term.

More importantly, however, Powell has not publicly bought into the prized objectives of the left, namely using the Fed to further social policy (i.e., wealth redistribution) and climate change initiatives, asserting that those are political decisions better left to Congress. Continue reading "Looking Past Powell"

Don't Fear The Taper

Long, long ago, even before the 2008 global financial crisis, the world’s central bankers, including the Fed, shifted their focus from trying to fight inflation to trying to create it. As we know, however, that pursuit of the holy grail of 2% has taken more than a dozen years, and now that we appear to be there, and well beyond it, in fact, the Fed refuses to believe it.

Ever since the economy began reopening earlier this year, the U.S. year-on-year inflation rate has been rising steadily and strongly, well above the Fed’s 2% target. In May, the YOY rise in the consumer price index hit 5.0%, while the core index, which excludes food and energy prices, rose 3.8%. Looking ahead, it’s hard to see inflation easing anytime soon, given the trend in rising worker’s wages, which once on the books are going to be hard to pull back, especially given the dearth of workers relative to job openings. Prices are also rising due to strong pent-up demand that is far outpacing the supply of goods, due partly to the lack of workers.

Yet Fed Chair Jerome Powell continues to insist that this recent surge in inflation is “transitory,” a mere temporary reaction to the economic reopening.

Is he saying that because he really believes it, or because he’s worried what will happen if the Fed starts to turn down the juice, even a little bit, and with a fair warning? Continue reading "Don't Fear The Taper"