Fed Chairman Powell is caught between surging inflation and progressive Democrats lobbying President Biden to replace him with someone more amenable to their social justice agenda.
As the economy reopened from COVID-19 lockdowns, inflation surged to alarming levels. Part of this was a jump in prices that were artificially depressed by the pandemic shutdown—car rentals, airline tickets, restaurant meals, and the like—which will not likely repeat.
Some prices overshot and are now receding—for example, used car prices. That may lower inflation readings for a month or two.
However, other pressures are building that represents an abrupt change from the pre-pandemic, low-inflation era.
The resurgence of COVID-19 in Asia demonstrates that North America and Europe have become vulnerable to production disruptions and weak public health systems. Hardening supply chains and shrinking working-age populations in Asia are limiting opportunities to access low-wage labor.
Mr. Powell correctly observes that most durable goods—appliances, computers, and the like—became cheaper in recent decades. However, he misses that government policies to accelerate decarbonization will increase manufacturing costs in the future—electric motors and batteries are more expensive than internal combustion engines.
The bond market’s expectation for inflation—measured by the difference in the rates between ordinary and inflation-adjusted bonds—might not recognize these facts, but the folks on the ground shopping for families, producing goods, and measuring the economy do. In recent months consumers, businesses, and private economic forecasters have all raised their expectations for inflation.
Progressive Democrats in Congress, who believe easy money policies and higher inflation promote more stable growth and greater equality by tightening labor markets and boosting wages, call for Mr. Powell’s ouster. Apparently bowing to these pressures, the Chairman warned in August that the Fed had erred too often by tightening in anticipation of inflation.
History teaches otherwise.
Twice this century, the Fed raised interest rates, and unemployment fell—improving labor market conditions. Those statistics are facts, and Mr. Powell refuses to see them. We can only wonder how much pressure from Democrats in Congress and the West Wing is distorting his vision.
Finally, the labor market is already tight with over 10 million unfilled jobs, and vacancies in manufacturing are about double pre-pandemic levels even though the economy still has not regained millions of jobs lost in the COVID-19 shutdown.
Administration stimulus policies—well beyond the now expired supplement to unemployment benefits—are discouraging work. For example, the means-tested Child Care Tax Credit, which provides $3600 for children under six and $3000 for those under 18 but declines as family incomes rise, provides a substantial subsidy to stay-at-home parents to mind the kids especially in high-income tax states.
Expectations that will be extended by the reconciliation bill and supplemented with free pre-K education and two years of free college further enables stay-at-home moms (and dads) to not participate in the labor force.
COVID-19 mutating into delta created another major surge of infections, especially among U.S. non-vaccinators and factory workers throughout Asia. This has disrupted supply chains in varying degrees throughout the world.
Now other variants, even more, contagious and resistant to vaccines, have emerged in South America and are finding their way into the United States and Europe.
The magnitude of the consequences of these economic and epidemiological factors is terribly difficult to model, but the general direction is clear. Should the economy slow again owing to further shortages of computer chips and all manner of other essential components, easy money will only further boost demand and push up prices. It won’t reopen factories, solve disruptions in supply chains or create jobs for the unemployed in public-facing jobs by sending folks with cash back to offices, restaurants, and dry cleaners.
Easy money will continue to juice the stock market and prices for new homes—impairing affordability for the very working-class workers social justice advocates want to help. And generally, push prices up faster than wages for working-class Americans.
At its September policymaking meeting, Mr. Powell will resist quickly tapering the Fed’s monthly $120 billion monthly purchases of Treasury and mortgage-backed securities, and that’s a tragic mistake.
With businesses unable to find workers and households now expecting inflation to run nearly 7 percent, a wage-price spiral could easily ignite. As Mr. Powell likes to lecture, it takes a good year for a change in monetary policy to influence inflation.
Hesitating now to taper can only fuel inflation, do workers little good and risk persistent runaway inflation that would ultimately require the kind of draconian tightening Chairman Volcker imposed during the early 1980s and a tough recession.
• Peter Morici is an economist and emeritus business professor at the University of Maryland and a national columnist.
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