Yesterday evening brought an interview with the man in charge of the world main central bank. Via the role of the US Dollar and the fact the US remains the largest economy Jerome Powell wields a lot of economic power. With the US Federal Reserve involved in so many areas he is wielding it. But there was a catch which seems to have slipped by many and it is in line with the fact that today brings the latest US unemployment and employment numbers with the non-farms payrolls report.
Via @FinancialJuice here are his comments.
FED’S POWELL: IT IS HIGHLY UNLIKELY TO GET TO MAX EMPLOYMENT THIS YEAR………. 4% WOULD BE A NICE UNEMPLOYMENT RATE TO GET TO, BUT WOULD TAKE MORE THAN THAT TO REACH MAX EMPLOYMENT………….
What they did not cover was when he said that the last 3 months had been disappointing in progress terms and whilst he was hoping for improvements he would in effect wait and see. This really rather contrasted with what we noted from Treasury Secretary Yellen back on February 8th.
“The Congressional Budget Office issued an analysis recently and it showed that if we don’t provide additional support, the unemployment rate is going to stay elevated for years to come,” she added. “It would take (until) 2025 in order to get the unemployment rate down to 4% again……..I would expect that if this package is passed that we would get back to full employment next year,” Yellen told CNN’s Jake Tapper on “State of the Union
In fact they are disagreeing on both points as Janet Yellen suggested a 4% unemployment rate was “full employment” but as you can see below Chair Powell does not.
FED’S POWELL: THERE’S A LOT OF GROUND TO COVER TO GET BACK TO MAX EMPLOYMENT………….MAXIMUM EMPLOYMENT IS MUCH BROADER THAN THE JOBLESS RATE, IT WILL TAKE TIME TO GET BACK TO FULL EMPLOYMENT. ( @FinancialJuice)
I will come to the financial market implications in a bit but there was quite a different emphasis here. It was reinforced by this bit.
WE NEED THAT PICKUP BECAUSE THE US IS STILL DOWN 10 MLN JOBS.
Inflation
Here there was much more alignment between Treasury Secretary and Fed Chair. One area of alignment is overuse of the word “tools” which has spread like a virus amongst central bankers and their ilk. But there is a problem as we look further.
WE EXPECT AS THE ECONOMY PICKS UP, WE WILL SEE INFLATION MOVE UP.
He is trying to present this as a good thing and hoped ( correctly) that the interviewing journalist would fail to point out this would make workers and consumers worse off. This allowed Chair Powell to add some central banking nuances to the great big lie on inflation. Firstly to claim that it is not really happening.
INFLATION IS BELOW 2% AND IT’LL PICK UP ON BASE EFFECTS.
If someone is unable to put food on the table I doubt they will be reassured it was only base effects! Next comes the recurring central banker lie.
Powell said price increases above the Fed’s 2% target for a couple quarters or more would not cause consumers’ long-term inflation expectations to materially change. ( CNBC)
In the UK it is described as temporary and Janet Yellen used to use the word “transient” whereas the fear is that it will be anything but.
Even if the economy sees “transitory increases in inflation … I expect that we will be patient.” ( CNBC )
So the new transient is transitory as we see a Yes Prime Minister style 4 stage process in play.
Stage two, we say something may be about to happen, but we should do nothing about it.
That is what Chair Powell is saying and here he is preparing for stages 3 and 4.
“We’re very mindful and I think it’s a constructive thing for people to point out potential risks. I always want to hear that,” he said. “But I do think it’s more likely that what happens in the next year or so is going to amount to prices moving up but not staying up and certainly not staying up to the point where they would move inflation expectations materially above 2%.” ( CNBC)
If the Fed has not reached its employment and unemployment goals then we will get the next stage.
In stage three, we say that maybe we should do something about it, but there’s nothing we *can* do.
At this point all the claimed tools would be gone and we got a strong hint of this during the interview as the emphasis was clearly on the labour market. Should inflation start to pick up then we can expect Chair Powell to switch to the last stage.
Stage four, we say maybe there was something we could have done, but it’s too late now.
What is most disappointing about this is that it is exactly the error that making central banks technocratic and independent was supposed to avoid. Politicians acted too late meaning the problem took more effort to remove and this is being put on repeat. There are still plenty around who claim central banks are independent in spite of the fact that it is an apparent sham.
Policy Moves
There were none apart from the implication that what Chair Powell called an effectively 0% interest-rate and US $120 billion a month of bond purchases ( QE) would be in play for some time yet. So the financial markets moved a chess piece or two.
The 10-year Treasury yield jumped back above 1.5% following Powell’s comments. ( CNBC)
It is 1.55% as I type this. This also led to a “Holla Dollar” burst. We can look at that from the perspective of two happy central banks as the ECB will be happy to see the Euro move towards 1.19 as will the Bank of Japan with a Yen move through 108.
In fact the ECB seems to be so happy that it has tried to give it another push this morning.
The European Central Bank has enough space to increase bond purchases in order to limit upward pressures on yields ( Bloomberg)
Perhaps they have forgotten they told us this last week and then cut them. Open Mouth Operations morphed straight into foot in mouth.
Comment
The most obvious contradiction in all of this is between the claims of a strong recovery and the way that both the fiscal and monetary pedals are being pressed to the metal. This is what is driving the way that Chair Powell is ignoring the inflation risk that in one sense rather trolled him yesterday.
OIL MARKET: Brent and WTI surge more than 4% after OPEC+ decides against a production hike. ( Bloomberg)
In itself it is just a relative price move but oil tends to feed into other prices and start the inflation cycle. Still at least they have kept house prices out of the inflation index so they can claim that they are a wealth effect and ignore the inflationary effect om first time buyers and those trading up. Making the switch would put the CPI inflation measure above 3% which would put the cat amongst the pigeons even though it is not the official target.
By the time some of you read this the labour market report will be out so let me mark your card for one number which is earnings growth. It is useless as an indicator right now.
The large employment fluctuations over the past several months—especially in industries with lower-paid workers—complicate the analysis of recent trends in average
hourly earnings.