Jerome Powell and Janet Yellen don’t worry about inflation. Maybe they should be

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And with the economy still struggling from Covid-19, neither Powell nor Yellen seem too worried that the unprecedented amount of stimulus from the central bank and Congress will trigger pressure for now. persistent inflationists.

Powell said in a conference in Princeton last week that there could be “some pretty exuberant spending” on the part of consumers in the coming months thanks to stimulus controls and an improving economy following wider access. vaccines. Some prices could increase as well.

But the Fed chairman argued that this wouldn’t necessarily be inflationary in the long run. Price increases could be – to use the Fed’s favorite buzzword – transient.

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Yellen also noted during her Senate confirmation hearing last week that she believed the Fed and the Biden administration should take advantage of near-zero interest rates and therefore spend more on stimulus.

In other words, now is not the time to worry about inflation.

“Inflation is always a concern and it’s an easy concept to understand,” said Mimi Song, chief economist at CrossBorder Solutions. “Weaker supplies could push up prices in the short term and more stimulus could push up disposable income.”

But Song argues that the global pandemic and recession are likely to limit prices. The priority must be economic recovery and not the fear of inflation in several years.

Inflation could return

Still, some fear Powell and Yellen are being too dismissive. The economy may not be able to stay in a scenario where inflationary pressure simmers without spilling over.

The 10-year Treasury yield is now back above 1% – its highest level since March. Oil prices also rose 10% last month. These are signs that investors are betting on more inflation sooner or later.

“There’s this tug-of-war over inflation,” said Todd Lowenstein, director of equity strategy for The Private Bank at Union Bank. “Inflation could be transient but we need to keep an eye on the bond market due to massive federal spending.”

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Lowenstein said stimulus spending, while necessary, could lead to further declines in the dollar, which would fuel the flames of inflation. But the Fed is unable to hike rates to stem inflation while the economy is still so fragile. Inflation could become a more constant problem.

“Could inflation take root? The Fed doesn’t want to fight it now, but historically the problem is that inflation is like toothpaste in a tube. You can’t put it back,” Lowenstein said.

If inflationary pressure mounts, the Fed cannot ignore it indefinitely – at some point, it must fight it.

And this is the key. The Fed has tried to stay out of politics and do what it thinks is best for the economy, no matter what action the President and Congress decide to take.

“The Fed risks losing the perception of its independence if it does not fight inflation,” said Adam Lampe, CEO and co-founder of Mint Wealth Management.

“An unexpected rise in inflation could be a risk,” he added. “Inflation is expected to be modest in 2021, but once out of the bag it could come back quickly.”

Keep an eye on wages and the labor market

So the Fed may be forced to raise rates sooner than the market is currently forecasting, or it may have to cut faster – or lower – its current bond buying program. The last time the Fed made a significant change to its asset purchases, in June 2013, stocks sold off quickly under what has been called “taper tantrum.”
Yet the main driver of inflation tends to be a healthy labor market and higher wages for workers. This is not currently the case.
According to the December jobs report, the average hourly wage is up about 5% from a year ago. But the government noted that these increases “largely reflect the disproportionate number of lower-paid leisure and hospitality workers who have lost their wages.”

In other words, wage growth would have been much lower if more Americans were actually working.

Other government data shows that there are only small pockets of inflation.

According to the latest consumer price index report, food prices have increased 3.9%. Home appliance prices soared 6.2% and used car prices jumped 10%. But overall, consumer prices have only advanced 1.4% over the past year.

“If you look at the stock market and sectors like housing, you might get the impression that the economy is back. But there is still enough slack in the labor market to prevent any inflation in the short term,” said Craig Fehr, investment strategist. to Edward Jones. “I don’t think inflation will be a predominant risk.”

Still, Fehr fears that inflation will inevitably become a major problem that policymakers must tackle.

“In the longer term, the risks of inflation cannot be overstated. The market expects incredible levels of stimulus from the Fed for a long time,” he said. “If you ask me what usually keeps me awake at night, it’s inflation.”

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