Jerome Powell and the Inflation Scare; Moderates in Congress Headed for a Big Win
Author: Greg Valliere
February 23, 2021
SO INFLATION IS CREEPING HIGHER: That’s a good thing, most Federal Reserve officials believe — a sign of life in an economy that has been under-performing for years.
RECENT FROTH IN BITCOIN and some residential real estate markets do not necessarily presage a major inflationary surge. There’s only one type of inflation that would truly worry the Fed — an over-heating labor market, which does not appear to be imminent.
IT’S CRUCIAL TO NOTE, as Fed Chairman Jerome Powell begins two days of congressional testimony, that he doesn’t believe the official unemployment data, which shows a 6.3% jobless rate. He and Treasury Secretary Janet Yellen believe it’s actually much higher, perhaps around 10%, with millions of workers still under-employed.
UNTIL THERE ARE CLEAR SIGNS of a booming labor market, the economy will continue to need medicine, which Powell will urge today. We’ve questioned whether the economy really needs $1.9 trillion (with pork), but something close to that amount is coming; Biden and his advisers are determined to “go big.”
ARE MONETARY AND FISCAL POLICIES too stimulative? Perhaps, but much of America has not recovered from the pandemic crash, Powell will assert. The Wall Street Journal editorial page — which has been paranoid (and wrong) about inflation since 2009 — has urged Powell to sound less accommodative, but he probably won’t.
THE GREAT MARKET FEAR is that the Fed Chairman eventually will indicate that the central bankers are thinking about tapering their massive asset purchases; even a hint of that could be a huge negative for equities, which fear a “taper tantrum.” But Powell isn’t remotely ready to reduce purchases.
SO LET’S NOT GET AHEAD OF OURSELVES: Budget deficits will stay very high and inflation eventually will exceed 2% — and the Fed will be comfortable with that scenario for at least the rest of this year. We’re not out of the woods yet, Powell will insist.
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THE DEMOCRATS’ LIMP PERFORMANCE in House and Senate elections last fall is already having major repercussions. President Biden simply doesn’t have the votes to win confirmation of the very partisan Neera Tanden as Director of the Office of Management and Budget; he’ll probably have to pull her nomination within days.
WITH THE SENATE TIED 50-50, Biden can’t afford to lose even one Democrat, which means West Virginia Sen. Joe Manchin will be the kingmaker. He’s a feisty moderate Democrat who opposes Tanden — and is determined to support the fossil fuel industry, go slow on big spending and resist huge new taxes.
THE LIKELY TANDEN DEFEAT is hardly a huge setback for Biden — replacements for her are already being vetted — but it sends a signal that not all of the administration’s objectives will prevail. What’s the next setback? The minimum wage probably won’t increase to $15 per hour over several years; the most Manchin would accept is a gradual rise to $11 per hour.
A CYNICAL THOUGHT: While moderation in Congress is obviously a positive story for the financial markets, could it also be a plus for Biden? As progressives push him hard for a huge infrastructure bill and new taxes, he has an excuse to go moderate — he can’t get a progressive agenda past Manchin. Biden could be comfortable with “progressive lite.”
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