Two things are going very wrong for Federal Reserve Chairman Jerome Powell’s hopes of getting reappointed. First, inflation is surging and shows no sign of abating as container ships crowd into the port of Los Angeles; not even working around the clock can get the supply chain caught up.
After Powell claimed for months that inflation would be transitory and supply chain disruption was just a hiccup, investors are coming to realize that we will have relatively high inflation well into next year and expectations may come un-anchored. As well, the ethics controversy over securities trades by top Fed officials has proven to have legs. Two presidents of Fed regional banks had to resign and now fund sales by Vice Chairman Richard Clarida—and even by chair Powell—have raised questions, especially in their timing.
Lame Excuses; Leadership Vacuum?
Clarida moved millions out of bond funds to stock funds in February 2020 just as the Fed was embarking on massive monetary stimulus that supported stock prices. The Fed said it was a pre-planned rebalancing move. It emerged last week that Powell sold off millions from a stock index fund in October 2020, a month which saw stocks lose 6% of their value. The Fed said Powell sold the fund shares because he needed to cover family expenses.
These excuses sound a bit lame given that we rely on these people to manage the Fed’s $8 trillion-plus balance sheet.
Powell announced new restrictions last week, prohibiting top Fed officials from buying individual stocks or holding individual bonds, while requiring 45-day notice on all investments, which must be held for at least a year. Many commentators felt the restrictions did not go far enough, though it is hard to figure out just what rules should apply to policymakers who generally are going to have significant assets.
Analysts have suggested that President Joe Biden’s delay in deciding on the Fed succession has created a leadership vacuum at the US central bank just when investors might be hoping for decisive action. The Fed is almost sure to follow through on plans to start reducing its asset purchases by $15 billion a month in November, but that seems a bit feeble in the face of rapidly rising inflation.
Powell may also still get the nod for a second term, but, rightly or wrongly, he’s starting to look like damaged goods.
Equally bad, Biden’s delay is robbing him of the momentum he might have gained for putting his stamp on the Fed. Granted, the President has been preoccupied with wrangling Congress into supporting his spending legislation, but the need for strong Fed leadership has surged in recent weeks.
The Fed’s Beige Book, which collects anecdotes from the regional banks ahead of meetings of the Federal Open Market Committee, last week documented how hiring bonuses and higher wages to recruit and keep staff, along with added transportation costs and persistent shortages, are combining to push up prices.
Furniture remained in high demand in several Fed districts. The Boston Fed said one furniture retailer had raised prices 30% while manufacturers in the district faced 10% to 30% increases in input costs, which led to some robust gains in output prices. The Beige Books have been indicating price pressures for months, but Fed economists remained fixated on their models that told them such increases are transitory. It is harder to ignore the evidence as it accumulates.
Powell maintained again on Friday that it is not time to raise interest rates, even though he acknowledged at a virtual conference for the Bank of International Settlements and South African Reserve Bank that inflationary pressures will last longer than expected.
But he said the “most likely case” was still for inflation to move back down next year, while he insisted the Fed is ready to act if it doesn’t.
Randal Quarles, whose term as vice chairman for supervision expired earlier this month, but who remains on the board of governors, made similar remarks on Wednesday, while Christopher Waller, the newest member of the board, said “a more aggressive policy response” than tapering may be warranted next year if inflation remains high through the end of the year.