Powell has heck of a job with inflation

Editorial | Mary Ma 19 Jul 2021

US Federal Reserve chairman Jerome Powell may be close to securing his political future if the prediction by a group of economists polled by Reuters turns out to be true.

Powell's current term is due to end in January 2022 and it is in everyone's interest to know who will be the world's most powerful central banker from February.

Will it be Powell, who started as a Republican appointee, or someone from the liberal camp whose ideology is shared by Democrats who want the Fed to get banks to respond to climate change and regulate the sector assertively?

That will be up to US President Joe Biden.

Nonetheless, Powell is undoubtedly doing his best to maintain the balance in the face of mounting inflation as the US reopens its economy from pandemic-related restrictions.

Political pressure has been increasing for him to act on inflation. But the question facing him is that, although raising interest rates can prevent prices from rising too quickly, it can also slow economic activities.

The central banker knows that, even though jobs are being created, many Americans are still out of work.

So would acting now, or prematurely, rock the boat? This must be Powell's biggest concern at the moment.

In his recent testimony to Congress, Powell admitted inflation had increased notably but he was quick to dismiss the increase as "transitory," saying the Fed would hold its horses and not change its ultra-easy monetary policy until the economy improves more.

When he was Fed chair during the Trump presidency, Powell had been openly criticized by the president for not going far enough to stimulate the economy.

This time around, it is rather clear that the same Fed chief has been acting in concert with Biden, whose recovery plan for the US demands the Fed treads the line carefully to keep the recovery on track.

Unlike Trump, who would let everyone know of his displeasure, Biden seldom opens fire publicly.

Yet if Powell fails in his expectations, this could also cost him the Fed job.

Not surprisingly, former treasury secretary Steven Mnuchin raised eyebrows when he cast doubt on Powell's judgment during a CNBC interview.

In the interview, Mnuchin disagreed that the current increasing inflation in the US was transitory as Powell had suggested.

Furthermore, Mnuchin called on the Fed to act ahead of the curve so that it would not end up having to raise interest rates to 4 or 5 percent to slow down the recovery.

In Mnuchin's opinion, the Fed should start tapering its asset purchases immediately.

Would Mnuchin have stated the same if he was still a member of the administration?

No one knows - but he did not say anything to this effect when he was still treasury secretary in the Trump administration. Maybe this is an example of the freedom one regains after leaving the government.

It is too soon to say the Fed will not change course, and its September policy meeting will be important.

Between now and then, the market may well expect the status quo.

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