Monday, November 22, 2021

Jerome Powell Will Face an Utterly Different Economy in a Second Term - WSJ

Over his first term in office, Jerome Powell became arguably the most dovish chairman in the Federal Reserve’s modern history, giving priority to full employment in an era in which inflation seemed extinct. In his second term he may have to execute the reverse: giving priority to inflation at the risk of sacrificing jobs.

The pivot could be painful for both Mr. Powell and President Biden, who reappointed him in part on his dovish record, and reflects the substantial reordering of economic conditions in just the past year. Inflation, at 6.2%, is its highest in 31 years. While employment remains 4.2 million below its pre-pandemic peak, labor shortages are widespread and wage growth is accelerating. All that threatens the Fed’s 2% inflation target.

For now, Mr. Powell and his colleagues hope and expect inflation to drop, as pandemic-related obstacles recede. But the risk is growing that the assumptions that undergirded Mr. Powell’s dovish turn are out-of-date. If so, interest rates may need to rise a lot, threatening a recession and Mr. Biden’s political fortunes.


Inflation may well drop. The Eurodollar market is indeed huge. Even the trillions recently minted by the Fed may not be enough to pump things up much. OTOH this may be whistling past the graveyard. But inflation dropping does not mean prices going down. We'll just have to enjoy the higher price levels. What's worrisome is how much our political class is seeming to enjoy all this new spending.

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Inflation may well drop, but possibly not for the reasons most think. If we get another big round of Covid (see Europe), then demand for goods and services may fall substantially. The idea that vaccines would solve all our problems hasn't worked out well so far, has it?

Posted by: jmod46 | Nov 22, 2021 11:26:21 AM

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