Jerome Powell and Janet Yellen are not worried about inflation. Maybe it should be

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And the economy is still struggling because of Covid-19, and neither Powell nor Yellen seem too worried that the unprecedented amount of stimulus from the central bank and Congress will still trigger persistent inflationary pressures.

Powell said in a discussion at Princeton last week that there could be “quite exuberant spending” on the part of consumers in the next few months due to stimulus controls and an improved economy as a result of wider access to vaccines. As a result, some prices may increase.

But the Fed chairman argued that this could not necessarily be long-term inflationary. Price increases could be – to use the Fed’s favorite keyword – transient.

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Yellen similarly remarked at the Senate confirmation hearing last week that he believes the Federation and the Biden administration should take advantage of near-zero interest rates and thus spend more on incentives.

In other words, now is not the time to worry about inflation.

“Inflation is always a concern and is an easy concept to understand,” said Mimi Song, chief economist at CrossBorder Solutions. “Lower supply could lead to higher prices in the short term and a higher stimulus could increase disposable income”

But Song says the global pandemic is that the recession is likely to keep the price cap. The priority must be economic recovery, not the fear of inflation in a few years.

Inflation could return screaming back

However, some fear that Powell and Yellen are too despised. The economy may not be able to stay in a scenario where inflationary pressure is falling without boiling.

The 10-year Treasury yield has now returned to over 1% – the highest level in March. Oil prices have risen by 10% in the last month. These are signs that investors are betting on more inflation sooner rather than later.

“There is this tug of war around inflation,” said Todd Lowenstein, director of action strategy at The Private Bank at Union Bank. “Inflation may be transient, but we need to keep an eye on the bond market because of massive federal spending.”

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Lowenstein said stimulus spending, while necessary, could lead to further declines in the value of the dollar, which would ignite the flames of inflation. But the Fed is unable to raise rates to stop inflation, while the economy is still so fragile. Inflation could become more of a consistent issue.

“Could inflation take root? The Fed doesn’t want to fight it right now, but historically the problem is that inflation is like toothpaste in a tube. It’s impossible to put back,” Lowenstein said. .

If inflationary pressures rise, the Fed cannot ignore it indefinitely – at some point, it must fight it.

And that is the key. The Fed has tried to stay out of politics and do what it deems best for the economy, no matter what actions the president and Congress decide to take.

“The Fed risks losing its perception of independence if it does not fight inflation,” said Adam Lampe, CEO and co-founder of Mint Wealth Management.

“An unexpected rise in inflation could be a risk,” he added. “Inflation should be modest in 2021, but once taken out of the bag, it could return quickly.”

Keep an eye on wages and the labor market

So the Fed may be forced to raise rates sooner than the market currently expects, or it may need to reduce its current bond-buying program faster – or lower. The last time the Fed made a significant change in its asset acquisitions in June 2013, the shares quickly sold into what came to be known as the “tantic tantrum.”
However, the biggest factor in inflation tends to be a healthy labor market and higher wages for workers. This is not the case now.
According to the December employment report, average hourly wages rose by about 5% from a year ago. But the government noted that these increases “largely reflect the disproportionate number of lower paid leisure and hospitality workers who have left their wages.”

In other words, wage growth would have been much lower if more Americans had actually worked.

Other government data show that there are only small inflation pockets.

According to the latest report on the consumer price index, food prices rose by 3.9%. Appliance prices rose by 6.2% and used car prices rose by 10%. But overall, consumer prices have gained only 1.4% in the last year.

“If you look at the stock market and industries like housing, you may feel that the economy is back on its feet. But there is still enough weakness in the labor market to prevent any short-term inflation,” Craig Fehr said. , investment strategist at Edward Jones. “I don’t think inflation will be a predominant risk.”

However, Fehr is concerned that inflation will inevitably become a major issue that policy makers need to address.

“In the longer term, the risks of inflation cannot be overstated. The market expects incredible levels of Fed stimulus for an extended period of time,” he said. “If you ask me what usually keeps me up at night, it’s inflation.”

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