“What [the Fed has] now said is — we're not going to do anything until we see a bunch of drunk people staggering around.” - Lawrence Summers, Fmr. Treasury Secretary
Larry Summers, who held top financial jobs under Presidents Bill Clinton and Barack Obama, took aim
at the Federal Reserve’s newfound patience on rate hikes last week. The comments feed into concerns that the one-two punch of fiscal and monetary stimulus will resurrect the inflation of the 1970s. My own take is that the Fed is more focused on getting people off the sidelines and dancing than throwing a frat party. They have looked in the mirror and realized their past mistakes; preemptive rate hikes left the economy with a residual chill. The inflation they anticipated never materialized.
Fed officials learned that the longer they let the expansion go on, the better the outcomes for the most marginalized of workers. Employers didn’t remove their blinders about who they believed could do a job until they had no choice but to broaden their searches. This is a result worth waiting for in an economy where worker bargaining power is weak and the risks of a sustained surge in inflation are still low.
That said, Fed Chairman Jay Powell will be forced to defend the new thinking at the press conference following the Federal Open Market Committee Meeting (FOMC). The FOMC statement on policy will acknowledge the progress the economy has made since the Fed last met: Employment, retail sales and the housing market have all expanded. Powell will focus on how far we still are from a full recovery. It would take more than one year of employment gains like we saw in March to recoup what was lost to the crisis and return the economy to the trend we were on before the pandemic took hold.
Powell will remind us why inflation is picking up now, before the Fed’s goals on employment are met. A sharp downdraft in prices a year ago is distorting year-over-year measures of inflation. Oil prices actually fell into negative territory in April of 2020 as producers were forced to pay buyers to store oil they didn’t need.
Bottlenecks in both goods and services have accumulated. They will create temporary flares in inflation but are likely to ease as we get into the latter part of the year. Powell will underscore why it would be wrong for the Fed to raise rates to snuff out inflation that is likely to abate on its own. He will resist putting a timeline on the Fed’s patience. Vice Chairman Rich Clarida has said he expects much of the transitory inflation we see to ease as we get into the fourth quarter.
Powell will be asked about reports of labor shortages and whether generous supplements are deterring some from working. Similar arguments were made when weekly supplements for unemployment insurance benefits were twice as large a year ago. The economic research on the supplements revealed that they were not the deterrent some feared; the overwhelming majority of workers accepted jobs instead of staying on the supplements, even when their pay was significantly less than the supplements. They preferred the security of having a job to temporary payments.
The larger hurdles for workers to return are fear and childcare. Working in restaurants and bars are among the riskiest for contagion. Vaccines were still hard for many unemployed workers to access, until recently. It takes five-to-six weeks after the first jab to reach full efficacy with a two-dose vaccine. That means many will remain sidelined until at least June.
More schools are open now but recent outbreaks have forced some to temporarily close. The latest federal aid package included money for childcare but it takes time to reach those who need it most. To go back to work, low-wage parents need childcare to be accessible as well as available.
A slow vaccine rollout abroad, a surge in cases and more contagious and vaccine-resistant variants are all downside risks. Controversy surrounding the Johnson & Johnson vaccine fueled conspiracy theories at home that, sadly, could further delay the slowing pace of vaccinations. Powell will have to acknowledge these risks as well, something Larry Summers has the luxury of ignoring.
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