Managing Inflation and Consumer Confidence
- Earl O'Garro
- Sep 5, 2021
- 3 min read
WSJ Article Title: Fed Chairman Powell Navigates the Inflation Debate[1]
On August 23, 2021 the Wall Street Journal published an article titled, Fed Chairman Powell Navigates the Inflation Debate, the writers describe how Jerome Powell, the Chairman of the Federal Reserve, was stuck in an unusually difficult position because of the unexpected global pandemic that ravaged both domestic and foreign capital markets and the emergence of the Delta Variant following extended stay at home orders issued by the U.S. Government in response to the Coronavirus outbreak. Chairman Powell had to confront whether to walk back a prior directive he issued approximately a year prior to the start of the global pandemic,[2] which instructed U.S. Central Banks to keep interest rates lower for much longer because of a preceding decade long period of low growth and inflation. Many the board members of the federal reserve had differing perspectives on the actions the Federal Reserve should take in response to the Delta Variant and the possibility of additional lockdowns and stay at home orders.
The Federal Reserve is tasked with two primary functions: (1) Promote maximum employment and (2) Stabilize prices (i.e. steadying inflation and moderating long-term interest rates). The Federal Reserve can quickly implement monetary changes that affect the nominal money supply which is a fancy way of saying “the affect of more money in the economic system”. By affecting the amount of money in the economic system, the Federal Reserve’s monetary policies can increase disposable income, increase consumer spending, and increase real Gross Domestic Product rather quickly. Conversely, fiscal policies or changes are a bit more arduous and take considerably more time to implement due to the number of decision-makers required—House of Representatives and Senators—as a result, fiscal changes take much longer and often times cannot be implemented quickly to address the needs of the economy.
Chairman Powell, was forced to confront the best path forward to ensure that consumers faith in the economy remained high while still managing potential rises in inflation. At the time of publication of this article there were two divergent views in terms of plans of action: 1) Some central bank officials believed recent price increases in consumer goods would correct on its own over time which would allow the Federal Reserve to stick to its pre-pandemic plan; 2) Other central bank officials believed that the increases in the prices of consumer goods signaled that high inflation was here to stay for some period and as a result central banks needed to consider raising interest rates much sooner and more aggressively than initially anticipated. Chairman Powell concluded that staying the course with his initial plan—allowing high prices to correct on their own over time—during this unprecedented time was the best course of action to manage inflation.
August Job's report, which showed virtually zero net change in leisure and hospitality sectors amplifies the economic affects of the Delta Variant. As a result, any plans the Fed had to taper its bond/asset purchases would need to be placed on a brief hold. What's interesting here, is while the Fed may have reached its ultimate goal of leveling inflation around the 2% mark by the end of summer, the Fed must now weigh how to compute the net affect of the Delta Variant stretching into the fall months as hospitalizations and new infections rise while also weighing the net affects of the supply chain disruptions that existed prior to the Delta Variant. As unpopular as this may sound, the Fed should begin tapering its asset purchases now and allow the resilience of the U.S. economy to shine.
Mr. Biden's disastrous strategy in Afghanistan together with low approval ratings makes clear that any and all consumer confidence will come by way of decisions made by the Fed. Peel the bandaid off, let the wound heal with a bit of air and sunlight...it works every other time.
[1] Wall Street Journal - https://www.wsj.com/articles/fed-chairman-powell-navigates-the-inflation-debate-11629730921?st=ntwro9j9ih1cudg&reflink=article_email_share [2] COVID- 19 Emergency Declaration – FEMA - https://www.fema.gov/press-release/20210318/covid-19-emergency-declaration
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