Opinion: The fall of the inflation ball by the US Fed shows the flip side of its dual tenure


US Federal Reserve Chairman Jerome Powell.Amanda Andrade-Rhoades / The Associated Press

Federal Reserve Chairman Jerome Powell chose a less than ideal time to announce that he is removing the word “transient” from the central bank’s current lexicon on inflation modifiers.

The statement by the chief of the US central bank last week before a congressional committee that “the risk of higher inflation has increased” came just as uncertainty over the economic impact of the Omicron variant of the new coronavirus sent financial markets into a vertigo. Mr. Powell’s about-face on inflation only contributed to the rout of the market.

Yet, aside from the timing, the importance of the Fed Chairman’s decision could not be underestimated. After insisting for months that the price hike was a “transient” phenomenon mainly due to supply chain bottlenecks, Powell finally admitted that the Fed was wrong. For months, he had overestimated the slowdown in the US labor market, allowing wage pressures to build up and expectations of future inflation to take hold among investors and consumers.

“I think the word transient has different meanings for different people. For many, it carries a time – a feeling of short duration. We tend to use it to mean that it won’t leave a permanent mark in the form of higher inflation, ”Powell told the Senate Banking Committee on November 30. “It’s probably a good time to take that word out and try to make it clearer what we mean.

Whether it’s the result of a communication breakdown or a misreading of labor statistics, it’s never a reassuring sign when the world’s leading central banker admits to an error of this magnitude. The question now hanging over the global economy is whether Mr Powell’s turnaround came soon enough to put the inflation genius back into the bottle without triggering a stock market crash or a much longer and damaging recession. than last year’s pandemic recession.

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The Fed may soon accelerate its plans to end the aggressive bond-buying, or quantitative easing, program that has seen it more than double its balance sheet – to US $ 8.65 trillion – since the start of the year. pandemic in early 2020. He announced last month he would reduce his monthly purchases of US Treasury bonds to $ 105 billion from $ 120 billion.

But Mr Powell’s statement last week, and Friday’s news that the US unemployment rate fell to 4.2% in November, increased the chances that the Fed will step up its “downsizing” efforts after the meeting. next week from the 12 federal members of the US central bank. Open Market Committee, with the goal of completing its quantitative easing program by March. This would pave the way for the Fed to start raising interest rates much earlier in 2022 than expected.

A slightly more hawkish Fed would complicate matters for Bank of Canada Gov. Tiff Macklem as he seeks to end the bank’s quantitative easing program and start raising interest rates. next year. Mr Macklem may have to get ahead of the Fed to keep the Canadian dollar from falling, although sustained oil prices may also help support the currency.

The Fed’s policy turnaround, which has the dual mission of controlling inflation and maximizing employment, should serve to undermine the case for expanding the Bank of Canada’s mandate. Finance Minister Chrystia Freeland is expected to announce this month whether her government will change the central bank’s current mandate – which is to keep inflation within a range of 1-3% per year – to add a target of full employment. Progressive economists have long advocated for such a change.

However, the Fed’s experience underscores the trade-off involved in a dual tenure. The US central bank maintained its extraordinary monetary stimulus throughout 2021 while waiting for the labor market participation rate to return to its pre-pandemic level. But hordes of Americans who lost their jobs during the pandemic have been slow to search for new jobs or have left the workforce for good. By focusing on the turnout, the Fed seems to have misinterpreted the other signs of labor market strain that are now fueling inflationary pressures.

If the release of November inflation figures on Friday shows US prices rising faster than the 6.2% annual rate they rose in October, Mr Powell can expect more Republican senators join those who have already announced their intention to vote against his nomination. to a second term at the Fed. US President Joe Biden announced his intention to reappoint Mr. Powell on November 22, but the US Senate must confirm the appointment.

“Sir. The Powell Fed has forced millions of American families to choose between paying the mortgage, feeding their families, filling their gas tanks, heating their homes, or buying Christmas presents,” the GOP senator wrote. of Arkansas, Tom Cotton, in a Wall Street Journal article of Dec. 1. -ed, the day after the Fed chief announced his intention to stop labeling inflation as transient. Instead of taking immediate action to deal with this crisis, the Fed has hid behind its “transitional” talking point, while pushing irrelevant awakened agendas like climate change and critical race theory. “

Ms. Freeland would be wise to avoid making the Bank of Canada a target for similar critiques by broadening its mandate to include policy issues outside of its inflation-fighting jurisdiction.

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