On August 27, 2020, Federal Reserve Chairman Jerome Powell delivered a seminal speech – New economic challenges and the Fed’s monetary policy review. On the same day, the Federal Reserve issued a statement – Federal Open Market Committee Announces Approval to Update Its Statement of Long-Term Objectives and Monetary Policy Strategy. I analyze this shift in this blog post – Fed statement marks new stage in macroeconomic paradigm shift (31 Aug 2020). At the time, it appeared that a major shift was taking place in the way central bank policy would be implemented in the future. Reuters report (28 August 2020) – With new monetary policy approach, Fed rests the Phillips curve – Reported that “a fundamental theory of modern economics may finally be put on hold”. At the time, I didn’t pay enough attention to “May” and now realize that after a few years teetering on the precipice of change, nothing has changed. The old guards are back and threatening the livelihood of the workers in their usual way.
Powell’s August 2020 shift means the central bank will focus on creating “maximum jobs” rather than sacrificing job growth, as some measure of future expected inflation is already higher than expected.
This means that central banks will no longer tighten monetary policy as job growth picks up before the inflationary effect – that is, they reject all the “forward-looking” bias given by the mainstream theory that policy must kill jobs before they lose jobs Growth has dropped significantly.
Following Powell’s apparent turnaround, several other central banks have followed suit, making similar commitments to full employment and taking a more dispassionate approach to inflation dynamics.
Also, unemployment is falling all over the world, which is a good thing for workers.
Someone must be reading Robert Louis Stevenson, because after a few months Mr Hyde is back in town, deadlier than ever.
The ECB has just held a meeting in Sintra (Portugal) where Jerome Powell attended yesterday (29 June 2022) with ECB President Madame Lagarde, essentially confirming that Our hopes for real change in 2020 are just pipe dreams.
Powell’s narrative takes us back to the 1980s and beyond, and it’s imperative to talk about a “soft landing” and “inflation first.”
He claimed that the Fed is not prioritizing its fight against inflation and will raise interest rates “just enough” to achieve that.
The problem is that central bankers don’t know what is “just right” because of the inaccurate nature of monetary policy implemented by raising interest rates.
We’ve always known it to be a rather “blunt” policy tool – it just means that there are several reasons for the impact to be ambiguous and subject to unpredictable time lags.
First, central bankers don’t know if raising interest rates will come under pressure from rising prices. At least in the short term, there is good reason to expect them to fuel inflationary pressures, especially if those pressures are the result of companies using market forces to pass on rising unit costs through markups.
Second, rising interest rates can also have a distributive effect, with creditors and people on fixed incomes enjoying the stimulus while debtors’ purchasing power declines.
How these distributional effects play out is uncertain.
Third, there are unpredictable time lags. Even under mainstream logic, rate hikes can affect rate-sensitive costs and expenses. Their effects are not linear.
People need time to adjust, for example, they may burn through their previous savings before cutting back on spending and borrowing.
Lags make policy difficult to implement, because if the goal is to affect the cycle, and policy intervention only starts to have an impact when the cycle has already changed, the results may indeed be perverse.
Fourth, eventually, interest rates will reach levels so high that they cause a recession and unemployment rises, which prevents companies from exercising this market power, as costs can lead to bankruptcy, and even OPEC oil sellers realize that they are suffering from declining sales and lose profits.
But the economic and social costs of this strategy are enormous and unreasonable.
At least according to my calculations.
But no, in Powell et al.
He told the audience in Sintra:
Are we at risk of going too far? Of course there are risks, but I don’t agree that this is the biggest risk to the economy…let’s put it this way, the bigger mistake made would be not being able to restore price stability.
He also said there is “no guarantee” that the Fed won’t cause a recession as a result of the current policy shift.
So unemployment is not the greatest risk – a familiar parlance in the neoliberal era.
Deliberately creating a recession – the worst economic disaster – is now back in the policy sphere – a contagion result.
Unemployment is no longer a policy objective to keep low, but a policy tool deliberately used to keep inflation low.
Every time I calculate the relative costs and benefits of this strategy, the answer is the same – high costs, low benefits.
Wasting millions of revenue-generating potential every day just to keep inflation low is never a responsible and efficient strategy.
Powell also acknowledged that inflationary pressures come from the ongoing fallout from the pandemic and the recent Russian invasion of Ukraine.
He did not mention OPEC’s anti-competitive behavior by using its monopoly power to drive up oil prices for personal gain.
But the question is, if these factors are indeed driving inflationary pressures, how does raising interest rates address the problems posed by these factors?
By increasing borrowing costs, they may be able to impact demand, but not shipping disruptions, factory closures, increased numbers of sick workers from Covid, the Russian invasion and OPEC.
Apart from going back to the script, the central bank had no response to this anomaly.
1. Inflation must be our top priority.
2. Inflation expectations may escape and become self-fulfilling.
3. Our only tool is to plunge the economy into recession, leading to increased poverty, etc.
4. But we do not comment on the obscene comments about CEO raises that are reported in the financial media every day.
Back in the 1980s.
This completely contradicts the August 2020 statement.
We are now back to the “forward-looking” approach – even before any expected blowout – central banks raising interest rates and pushing up unemployment.
This is a very expensive strategy.
They are effectively saying that even with supply constraints, they are prepared to reduce aggregate demand to the level of reduced supply.
So the question is, what happens when supply resumes when factories reopen, ships move, etc.?
Then they will leave behind a mass of unemployed, some of whom will be forced to default on their mortgages and lose their homes as a result, some of whom will commit suicide, not to mention a generation of workers who leave schools that face limited opportunities for advancement in the labor market.
A clusterf*xk!
It is best to understand that inflationary pressures are temporary and keep unemployment low while temporary factors come into play.
Powell and Lagarde told the Sintra meeting that they had been waiting for a rate hike because the price hike was a “transient consequence of the supply chain” caused by the coronavirus pandemic.
They really are.
The mistake they make is to equate “temporary” with short term.
Transitory has no time element. It has a causal factor.
The reasons will take time to work out, no doubt about that.
But it would be foolish to add an additional (very expensive) problem to the mix (recession) when these causal factors will eventually dissipate.
Another claim made by these central bankers in Sintra is that there is a large amount of private savings in the system that could act as a buffer against rising interest rates.
In other words, intentionally creating job losses and loss of income, and hoping that spending doesn’t drop as the unemployed are forced to reduce their wealth to make ends meet.
All of this will destroy low-income families.
The only central bank currently standing firm on all this madness is the Bank of Japan. clever.
European Commission Spring Forecast
If you go back and read the European Commission’s — Spring 2022 Economic Forecast: Russian Invasion Tests EU Economic Resilience – You’ll notice that the inflation forecasts for 2022 and 2023 do not imply any deep-seated inflation problems.
The chart below shows the forecast for 2022 and 2023.
Find any major persistent inflation acceleration.
Now the committee may be wrong (probably), but the way the ECB is talking now – in tune with the irresponsible Fed – at least clearly sees a breakdown in European policy coherence.
The committee thinks inflation will subside quickly next year – and the ECB is talking about preparing to create a recession to “tamp down” accelerating inflation.
in conclusion
Irresponsible central bankers are out of control again.
Enough for today!
(c) Copyright 2022 William Mitchell. all rights reserved.
