Federal Reserve

Another Imperial Regulator on the Way?

December 1, 2021 by Andrew Stuttaford Leave a Comment

Federal Reserve in Washington, D.C. (jjgervasi/iStock/Getty Images)

One of the features of the first year of the Biden administration has been the way that regulators are increasingly trespassing into territory more properly reserved for legislatures.

If it is true that Richard Cordray is going to be nominated to the Federal Reserve as vice chair for supervision, which is what current talk now suggests (his name is certainly under consideration), it could mean that another imperial regulator may well be on the way to being appointed.

The Wall Street Journal’s editorial board summarizes Cordray’s career here. Let’s just say that it doesn’t make entirely reassuring reading. Let’s also note that Elizabeth Warren is something of a fan.

What does the job entail (in theory)?

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CNBC explains:

The Fed’s vice chair for supervision, a role created in the aftermath of the 2007-09 financial crisis, serves as one of the nation’s top bank watchdogs and is responsible for ensuring the health of the nation’s largest lenders like JPMorgan Chase, Goldman Sachs and Citi. The official monitors banks’ balance sheets, capital reserves and broader systemic risks that could arise in the event of an economic downturn.

That sounds sensible enough, but keep an eye on that phrase “systemic risk,” something that has come to mean rather more than it should, notably when it comes to climate issues, as John Cochrane discussed in a recent Supply & Demand post for Capital Matters. Here’s an extract:

A “risk to the financial system” does not mean that someone, somewhere, someday, might lose money on an unwise investment. A risk to the financial system means an event like 2008: a shock so big, so pervasive, and so fueled by short-term debt that it sparks a widespread run, a wave of defaults, and threatens the ability of the whole system to function. “Financial regulation” means looking at the assets and liabilities of financial institutions to mitigate such a risk. It can at best look a few years in the future.
So, if we use plain English, a “climate risk to the financial system” that “financial regulators” can contain must mean the climate might change so drastically, so abruptly, and so unexpectedly, in the next five years, that the economy tanks so terribly that financial institutions blow through the cushions of equity and long-term debt, to spark a widespread systemic crisis like 2008 or worse.
The trouble is, there is absolutely nothing in even the most extreme scientific speculations to support that possibility. Climate is the probability distribution of weather: the chance of heat and cold waves, floods, fires, and so forth. We know with great precision what the climate will be for the next five years. Nobody writing insurance in Florida is unaware of the chance of hurricanes. The chances of extreme weather are not going to change unexpectedly in even ten years. The sea level is rising. It will continue to rise, about 4 millimeters per year – 2 cm in the next five years – slowly and predictably. Risk is the unknown. This is known.
Moreover, even weather extremes just don’t move the economy that much. We have had many financial crises in history. Not one was sparked by an extreme weather event. Our modern, national economy is remarkably immune to weather. . . .

The Wall Street Journal:

Chairman Jerome Powell has said he will defer on regulation—which would include climate change—to whomever Mr. Biden appoints as vice chair of supervision. Was that part of the understanding when he was reappointed? Mr. Cordray, backed by vice chair nominee Lael Brainard, would have enormous power to impose a progressive agenda on big banks.
This could include making too few loans to minorities or too many to fossil-fuel companies. With control over bank capital standards and dividend policies, he would have enormous sway over Wall Street. As Nebraska Sen. Ben Sasse put it in a press release Tuesday, “Richard Cordray is a wannabe king.”

A king? Perhaps, although another Republican senator, Louisiana’s John Kennedy, has described Cordray as being to the “left of Lenin.” Either way, the message is clear. If appointed, Cordray could not be relied upon to keep within the boundaries of what this job is meant to be. In a democracy, regulators should regulate, not legislate. In the Biden era, that cannot, sadly, be taken for granted, meaning that the legislators in the Senate would not be doing their jobs if they approved Cordray or, if he’s not chosen, any other nominee who might be tempted to use his or her power to advance an agenda that ought to be decided by the elected, not the selected.

Powell Sticks to New Hawkish Stance, Saying Inflation Might Not Slow in 2022

December 1, 2021 by John Carney Leave a Comment

Some investors were hoping Federal Reserve chairman Jerome Powell would attempt to walk back remarks he made yesterday that were interpreted as a pivot away from raising employment toward fighting inflation.

Instead, Powell doubled down on his concerns about inflation, saying the Fed cannot be sure that inflation will fade in the second half of next year as many economists expect.

For most of this year, Powell had argued that inflation was rooted in supply-chain constraints that would ease as the virus retreated, spending rebalanced away from the pandemic-era focus on goods purchases, and the economy adjusted. Now Powell says that the outlook on all those fronts is much murkier, although he still thinks that an easing of inflation is “likely.”

“The point is, we can’t act as if we’re sure of that,” Powell told the House Financial Service Committee on Wednesday. “We’re not at all sure of that. Inflation has been more persistent and higher than we’ve expected.”

Inflation has been running at the fastest rate of price increases in three decades and recent indicators suggest that it is still accelerating. What started out as “narrow” inflation concentrated in just a few products, has become widespread throughout the economy.

Powell also sounded a Republican populist note on Wednesday, downplaying the risk that rising wages would create what economists call a wage-price spiral that pushes inflation up.

“We like to see wages move up,” Powell said. “At this point, we don’t see them moving up at a troubling rate that would that would tend to spark higher inflation, but that’s something we’re watching very carefully.”

Fed Chair Jerome Powell Pivots to Inflation Fighting

November 30, 2021 by John Carney Leave a Comment

Federal Reserve Chairman Jerome Powell said Tuesday that the Fed’s target for inflation had been reached and that the Fed would consider accelerating the wind-down of its easy-money policies in light of persistently high inflation.

The announcement marks a major pivot for Powell into an inflation-fighting mode. Until Tuesday’s testimony before the Senate Banking Committee, the Fed chair had emphasized the need for the Fed to proceed slowly and cautiously to avoid hurting the recovery by tightening too early.

“The economy is very strong and inflationary pressures are high,” Powell said. “It is therefore appropriate, in my view, to consider wrapping up the taper of our asset purchases … perhaps a few months sooner.”

The Fed began to shrink its monthly bond purchases this month, a process known in the financial sector as “tapering.” At the pace announced for November and December, the Fed would stop adding to its bond portfolio in June—although it would continue to make new purchases to replace bonds as they matured.

At Tuesday’s hearing, Powell signaled that Fed officials would discuss a speedier wind-down of the purchases when the Fed’s policy committee next meets in mid-December. That would put the Fed on a path to likely raising rates as early as the first half of next year.

Powell’s remarks at the hearing cleared up some confusion created by the release of his prepared remarks the night before. Some interpreted references to the omicron variant as a signal that the Fed would become more cautious about tightening, perhaps slowing the wind down while it waited to see the impact on the economy. Others thought the references pointed in a “hawkish” direction, signaling a more aggressive stance on fighting inflation.

When the pandemic first struck, the Federal Reserve and the U.S. Treasury acted together. Both monetary policy and fiscal policy were loosened to provide ample liquidity to the economy, pumping up incomes, savings, and spending in an attempt to stave off the kind of fall in demand that can trigger economic slumps in times of unexpected shocks or crises. The economy briefly entered a very deep recession last year but exited almost immediately once the severest restrictions on economic activity were lifted.

This year, it became clear that the longer-lasting effects of the virus on the economy were on the supply side. Instead of the brief hiccup in supply chains and employment levels that many at the Fed expected, low labor market participation and supply chain problems have persisted and even spread. Coupled with robust demand for homes and goods such as appliances, cars, and furniture from consumers pumped full of stimulus money and low levels of unemployment, this has created the conditions for high and rising inflation at the very time Fed officials thought inflation would be fading.

The risk now is that omicron could lead to factory and port shutdowns around the world. It may also make some Americans now on the sidelines hesitant to return to the workforce. The migration of spending from goods to services could be thwarted or reversed if people turn away from eating out and travel again to avoid infection or just the inconveniences of mask requirements and social distancing.

“The recent rise in COVID-19 cases and the emergence of the Omicron variant pose downside risks to employment and economic activity and increased uncertainty for inflation,” Powell said. “Greater concerns about the virus could reduce people’s willingness to work in person, which would slow progress in the labor market and intensify supply-chain disruptions.”

The idea of tightening monetary policy earlier got bipartisan support at Tuesday’s hearing. Several Republicans, including the panel’s ranking member Sen. Pat Toomey (R-PA), urged Powell to speed up the bond-purchase wind-down and move away from the central bank’s ultra-accommodative stance. They were joined by Sen. Mark Warner (D-VA) on Tuesday.

“I do hope that you will move more aggressively on this tapering,” says Warner, one of the leading Democratic moderates.

Senator Joe Manchin (D-WV) has been publicly fretting about inflation and pushing Powell for an end to bond-buying for months.

Questioned about Powell’s earlier insistence that inflation was transitory, Powell insisted he had been misunderstood. The word transitory was not meant to convey the idea that inflation would be short-lived but merely that it would not permanently result in higher inflation, Powell said.

“It’s probably a good time to retire that word and try to explain more clearly what we mean,” he said.

For over a year now, Powell has been emphasizing the Fed’s mandate to maximize employment, arguing that this meant not only lowering the overall unemployment rate but making sure the benefits were spread more equitably. On Tuesday, Powell acknowledged that the burden of high inflation also hurt equality, saying it “imposes significant burdens, especially on those less able to meet the higher costs of essentials like food, housing, and transportation.

Powell got the nod for a second term as Fed chair last week from President Joe Biden. Some Fed-watchers think that may have made Powell feel less pressure to continue to advocate for an accommodative stance.

Stocks fell sharply on Powell’s hawkish stance on Tuesday, with the Dow Jones Industrial Average, the S&P 500, and the Russell 2000 each falling around 1.9 percent. The Nasdaq Composite declined 1.55 percent.

—The Associated Press contributed to this report.

Why Supply Inflation Stymies the Fed

November 2, 2021 by Ramesh Ponnuru Leave a Comment

My column today explains why it’s not a kind of inflation the Fed is equipped to handle:

If any pollster ends up surveying the least popular words of 2021, “transitory” and supply chain” might make the list just behind “inflation.” What makes our situation so frustrating isn’t just that we haven’t seen a string of monthly price increases like this one in decades. It’s also that the type of inflation we are experiencing is particularly painful. . . .

U.S. Inflation an Outlier, New Report Says

October 27, 2021 by Dominic Pino Leave a Comment

Bloomberg reports that the Institute of International Finance (IIF), the trade group for the financial-services industry, has found that while all countries are dealing with post-pandemic inflation, the United States has it worse than most. In a new report to be released in full tomorrow, the IIF says there’s a supply-side reason and a demand-side reason for America’s outlier status.

On the supply side, shipping delays in the U.S. are worse than shipping delays elsewhere, the IIF says. This is consistent with the point that Scott Lincicome made back in September: American ports are near the bottom of the developed world in terms of efficiency, and that results in reduced capacity. This is not primarily because of COVID, but rather because of labor and trade policy that has been in place for decades. According to the most recent round of service announcements from DHL, ships are waiting eight to ten days for a berth at Los Angeles/Long Beach. They’re waiting one to two days at Shanghai and Ningbo. American West Coast congestion is so bad that it’s becoming worthwhile for some shippers to send their cargo through the Panama Canal to East Coast ports instead.

On the demand side, the IIF says that American consumers are spending much more than other countries. One reason for that may be that the U.S. had much more generous COVID relief than most other countries, including direct cash payments, which hardly any countries did. Many families received a total of nearly $70,000 in relief from April 2020 to September 2021. People used that money to pay down debt, and savings increased dramatically, but they also spent a lot of it. Unlike other areas, consumer spending actually did see a V-shaped recovery, and the U.S. was back at pre-pandemic levels of consumer spending in January of this year. People spent more than usual on goods relative to services, because many services are still not back to normal, and travel isn’t what it used to be. As Michael Brendan Dougherty pointed out recently, the present crisis is from an overflow of goods, not a dearth.

The IIF says these supply and demand factors have combined to allow U.S. companies to mark up prices higher than in other countries. If consumer demand is higher, you can charge more for products, and people will still buy them. That demand component, according to the IIF report’s authors, indicates that inflation is less transitory in the U.S. than in other countries they studied.

The Federal Reserve has so far been committed to the view that inflation is transitory. To a certain extent, the bed may already be made for the Fed on inflation. After months of holding steady, the U.S. bond markets have begun to show increased inflation expectations since the end of September. The five-year break-even rate currently sits at 2.99 percent, the highest mark since at least 2003. Add in the top-line conclusions from this IIF report, and it’s not an encouraging mix.

In other news, Nancy Pelosi announced today that Democrats are “in pretty good shape” to pass the reconciliation bill and the bipartisan infrastructure bill, which would flood the economy with trillions more dollars.

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