The Fed’s “Special Topics”
This week, Federal Reserve Chair Jerome Powell gave two days worth of testimony before Congress. As part of his testimony, he presented the Monetary Policy Report July 2021. With this week’s major economic news flow undoubtedly being that (price) inflation, as measured by the Labor Department, is on the dramatic rise, it’s easy to lose sight of the Fed’s “special topics” outlined in Powell’s report.
The report mentions:
The labor force participation rate (LFPR) has improved very little since early in the recovery and remains well below pre-pandemic levels.
But this seems strange. Just last month various news outlets, including CNBC, had headlines to the effect of:
Job openings set record of 9.3 million as labor market booms.
The Chair doesn’t mention job openings but provides various reasons why the LFPR is down, including the explanation that the:
level of unemployment insurance benefits may also have supported individuals who withdrew from the labor force.
Imagine an America where individuals must choose between working to receive a salary or not working and still receiving a salary….
Powell moves on to price increases, noting:
Consumer price inflation has increased notably this spring as a surge in demand has run up against production bottlenecks and hiring difficulties.
The concept of “bottlenecks” continues to take a large part of the blame for the increase in prices lately. However, what level of bottlenecks should be across all industries, whether they should exist at all, and what the Fed can do to manage said bottlenecks hasn’t been specified by Powell.
“Inflation expectations” are another area the Fed tries best to manage, as the notes to the report specifies:
Inflation expectations are often seen as a driver of actual inflation, which is why a fundamental aspect of the FOMC's monetary policy framework…
Inflation expectations have been on the rise. Yet various surveys, expert opinions, forecasters and market-based measures allow the Fed to understand inflation expectations, which in turn drive “actual inflation” doesn’t add up. If it were that easy, there shouldn’t be any inflation problems in the USA, or anywhere else in the world. If inflation expectation only influences a portion of the actual inflation numbers without knowing whether that influence is 1% or 99%, the Fed will have no concept as to how effective its efforts to influence opinions really are.
Lastly, there remains “the balance sheet.” Per Powell’s report:
The Federal Reserve's balance sheet has grown to $8.1 trillion from $7.4 trillion at the end of January, reflecting continued asset purchases to help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.
Of all the Fed’s special topics, this remains the most stunning: that we live in a society where $8 trillion has been lent out by a central bank on the basis of fostering a smooth and accommodative market. What can hardly be explained in great detail has become the Fed’s guiding principle, responsible for the increase in the money supply and suppression of interest rates for a very long time. The response from mainstream economists, members of government and the public remains deafening. Either they don’t understand or don’t care enough to demand that the Fed’s hand be halted. And if they do understand the problem, at the present time they remain in a position to do little about it.