They Also Serve Who Only Float And Wait

The presidents of the regional Federal Reserve banks of Dallas and Boston resigned when it was revealed they have been trading heavily in assets the values of which are sensitive to the Fed’s interest rate policies – of which they have intimate knowledge and which they help to formulate. No Fed rules barred such trading.

A horrified Jay Powell, chairman of the Fed, plans to rewrite those rules. He’d best hurry. President Biden is expected to announce next month whether he will nominate Powell for another term as chairman when his present term expires in February. My bet is that Biden will find a candidate more agreeable to his progressive left.

Powell Is Done

Massachusetts senator Elizabeth Warren, who has  strong ties to the President, fired the first shot when she denounced Powell as a “dangerous man” who is destabilizing the financial system by unwinding the regulations put in place after the 2008 financial crisis.

Warren has the enthusiastic support of the self-styled progressive wing of her party for whom Powell is another old, straight, white guy occupying a highly visible seat of power that should be filled by a woman, preferably of color, even more preferably one who ticks some other boxes of identity politics, and who is green enough to suit them. With Biden as its leader, the moderate center cannot hold: Powell is a dead man walking.

Powell’s defenders – and there are many – point out that the banking system is in the strongest capital position it has ever been. His management of monetary policy, however, is attracting increasing skepticism. Inflation is running at 4.2 per cent as the Fed measures it, and 5.3 per cent as consumers experience it, high enough to wipe out most wage gains, and to frighten consumers and investors. By keeping interest rates at zero – negative, in inflation-adjusted terms – Powell & Co. hope to super-heat the economy to overcome enduring problems contributing to the gap between the unemployment rates of white workers and minorities groups. Many central bankers are less certain that monetary policy can solve those problems.

The chairman admits he finds it “frustrating to see the bottlenecks and supply chain problems not getting better – in fact, at the margin, apparently getting worse,” and that he underestimated the length of the “transitory” period during which inflation would spurt, although he continues to insist the inflation rate will “drop back toward” the Fed’s 2 per cent goal after a supply-side adjustment. But at some point “transitory” is no longer an accurate description of the problems facing the supply-side of the economy as it attempts to meet the pent-up demand created by the pile of savings and unused credit accumulated by consumers and businesses during the pandemic.

Of Chips and Ships

Semiconductor factories take years to build and their staffs still more years to train. Meanwhile, several such factories in China have shut down for lack of the coal-based electricity supplies on which they rely, a problem not quickly solved. Ports and related facilities cannot be expanded overnight, which is why a flotilla of ships lolls off over-stretched West Coast ports, waiting to unload goods that a shortage of lorry drivers will further delay from reaching markets. Lest you think this a problem confined to the West Coast: Savannah, Georgia’s port, the fourth largest for seaborne imports, has had between 20 and 24 container ships idling in the Atlantic waiting to unload, with the goods then stacked up waiting for trucks and truckers. As Axios points out, customers are finding it somewhere between difficult and impossible to find Fancy Feast cat food, caffeine-free Diet Pepsi and Salomon sneakers in black. To which add Evian water and some of Starbucks’ drinks and delectations.

Predictably, such a situation results in higher prices. Bed Bath & Beyond reports that prices of shipping containers for goods coming from Asia have risen from $2,500 to $6,00-$7,000 in six months, which news contributed to a plunge in its share price. And some retailers claim that shipping costs now exceed what have been the total costs of products they are bringing to market.

Demand for Stuff and Workers Overwhelms Supply

Port operators are warning that only a major drop in consumer demand for goods destined for American consumers can ease the port bottleneck soon. That won’t happen. In August, new orders for core durable goods were 13.7 per cent higher than last year, and retail sales are running 13.1 per cent above last year, with spending switching from services that make little demand on shipping to such stuff as furniture, which adds to demand for shipping space.

Wages and benefits (e.g., college tuition) are rising rapidly and becoming embedded in cost structures as Amazon (after adding 500,000 workers last year it will add 125,000 this year to its worldwide total of 1.3 million), Walmart (adding to its 1.6 million US workers some 150,000 after taking on 500,000 last year) and Target (hiring 130,000) lead others in a competitive scramble to recruit hundreds of thousands of workers. That adds to the cost pressures manufacturers face from a trebling in prices for inputs such as steel and petroleum-related products.

Up Go Prices

In the retail sector, big-box chain Costco has been forced by cost pressures to raise prices by as much as 4.5 per cent, while Dollar Tree is reluctantly abandoning its legendary $1-dollar ceiling and pricing some items at $1.25 and $1.50 in some of its stores. Home prices are up almost 20 per cent in the year ending in July, natural gas and oil prices have skyrocketed, with gasoline prices ($3.27 per gallon) now 45 per cent higher than last year’s average. There is more to come as the transitory period lengthens: Fed Ex has announced a 5.9 per cent rate increase, effective next year. There will be others.

Consumers and Investors Fret

The Fed might be relaxed about the inflation outlook, but 82 per cent of Americans tell Pew Research pollsters that inflation is a very big (51 per cent) or moderately big (31 per cent) problem, perhaps one reason consumer confidence fell this month. Politicians notice these sorts of things.

Consumers are not alone in seeing what the Fed cannot. Inflation-wary investors are repricing their inflation expectations: they have driven the interest rate on 10-year Treasury bonds up by 30 per cent since mid-July, a rise more troubling for its rapidity than for the level rates have reached. These rate rises ripple through the economy to mortgages and auto loans notes Amrith Ramkumar in The Wall Street Journal.

As consumers and investors survey the scene, their inflationary expectations rise, the very expectations that the Fed is counting on to “anchor” prices in the long run.

Biden’s Magic Costless Spending

This is the economy into which the Biden administration wants to pump $4-$6 trillion dollars of purchasing power, and will probably be forced to get by on half that – $2,000,000,000,000 – at least for now. Not to worry says the President. His $4-6 trillion program “is gonna cost nothing because we are gonna raise the revenue to pay for the things we are talking about.” So go ahead and book that expensive winter vacation. Its gonna cost you nothing because you are gonna earn the money to pay for it.

And while you’re at it, order now anything you hope to receive by Christmas.