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Jay Powell’s Second Go Round

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Now that Joe Biden has re-upped Jerome Powell as the chair of the Federal Reserve, another of the philosophical monetary policy quandaries has been resolved. Rather than speculate further on whether the tea leaves involve the new chair being a hawk or a dove, it turns out he’ll be neither. The primary threat to the incumbent was Lael Brainard. She is now the Fed’s vice chair and critics suggest her environmental crusading would have made her a damaging choice. So… second worst – same as the first. It seems Powell is more like a groundhog.

What central bankers the world over are trying to pull off reminds me of the old saw: ‘The operation was successful, but the patient died’. In this case, the ‘operation’ involves keeping the stock market afloat and the ‘patient’ is the broader economy. At some point, something must give in a world where there is no real alternative. On one hand, central bankers could raise rates to stave off inflation, but that would destroy the recovery. On the other hand, central bankers could allow inflation to do whatever damage it will do (hint: it will destroy the recovery)… only with no blood on our hands as the perpetrators of the predictable destruction.

Central bankers have painted themselves into a corner. The effective and necessary response to Covid in the spring of 2020 has created a totally new and likely more deadly monster that involves runaway inflation, massive social inequality and investors who somehow have come to believe they are bulletproof in 2021. None of this has any basis in logic – or any precedent in history that ends well. As a result, central bankers play an ongoing game of plausible deniability. They say dubious things and change their stories frequently – even if only in nuanced ways – to maintain a veneer of control, sound management and a careful monitoring of an ever-evolving situation…. cool story, bro.

The truth is that we have painted ourselves into a corner. We cannot raise rates without destroying the economy and we cannot maintain rates without inviting inflation to run rampant. The clearly political decision has been to err on the side of non-culpability and to allow inflation to escalate on the pretense that serious steps will be taken when the situation gets out of hand – as if that isn’t already the case. Then, when something happens to burst the economy’s and the market’s respective bubbles, central bankers will point to that something and deadpan that their plan would have worked if not for the dastardly occurrence that caused everything to come crashing down. The crash is inevitable. All we’re doing now is jockeying over who accepts the blame. The groundhog has his ‘don’t look at me’ speech written already.

John DeGoey

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