By Michael O’Neill
Central Bankers worldwide have vowed to leave interest rates unchanged until inflation rates reach a predetermined target. The Bank of Canada doesn’t think it will happen until the second half of 2022. That guess looks like precision forecasting compared to the Fed. The Fed will only raise interest rates after a period of monthly inflation readings above 2.0%, and the US recoups all jobs lost since the pandemic, regardless of the unemployment rate. The Fed’s targets are fluid and subjective.
Mr Powell sounds a lot like 1988 Presidential candidate George H Bush who famously responded to a question of taxes: “Read my Lips: No new taxes.” He won the 1990 election, then hiked taxes.
Treasury Secretary Janet Yellen sure sounded like she believed the Fed would need to raise interest rates to counter inflation in remarks to “The Atlantic.” She said ““It may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat.”
That answer is clear and unequivocal.
But it is not the answer that the Fed or Biden Administration or any central banker wants to hear.
Officials went into full damage-control mode.
Ms Yellen went to the Wall Street Journal to “clarify” her comments. It is not clear if it was at the behest of Biden Administration officials or Jerome Powell.
Ms Yellen said that she wasn’t forecasting a rate hike, although if she wasn’t what does “It may be that interest rates will have to rise… Mean? George Orwell fans know. It is Doublethink:” defined as the power of holding two contradictory beliefs in one’s mind simultaneously, and accepting both of them.”
Fed officials are stomping all over the idea of an inflation-triggered rate hike. San Francisco Fed President Mary Daly said the economy is a long way” from achieving the Fed’s dual mandate (full employment and inflation around 2.0%). She wasn’t even ready to discuss reducing Quantitative Easing purchases, let alone raising interest rates.
To be fair, the Fed doesn’t deny there are some inflation pressures. They just dismiss them as being “transitory” due to base effects. (The base effect merely means that current rates of change are calculated on the extremely low levels seen at the height of pandemic lockdowns.)
Boston Fed President Eric Rosengren repeated the FOMC’s view on May 5, saying, “My view is that this acceleration in the rate of price increases is likely to prove temporary,”
Then he used toilet paper and Clorox bleach as examples of temporary price increases. Mr Rosengren insists it is too soon to know whether trend inflation will rise as the economy recovers.
Really? Inflation is rising. There is no doubt about it! The issue is whether the Fed is ahead of or behind the curve.
Anecdotally, every consumer knows that far too many prices are higher today than they were a year or two ago. Ask a homeowner that just built or replaced a fence. Ask a home builder. In the Greater Toronto Area, skyrocketing lumber costs have added $30,000 to the cost of a new home. Grocery shoppers notice that fewer products are on sale, which means the grocery bill is rising even if prices have not.
Consumer product giants are not sitting still. Proctor and Gamble announced price hikes on a range of products beginning in September.
Coca-Cola, Kimberly Clarke, and J.M. Smucker are raising prices as well.
It doesn’t stop there.
Commodity prices are on a tear. West Texas Intermediate (WTI) oil soared over 38% since the beginning of January. Iron Ore prices climbed 27% since February,
Coal and Wheat are also higher. Analysts describe the price gains as a “supercycle,” fueled by massive US government spending and post-pandemic demand from China.
Only a central banker believes that higher resource prices, which raise costs for manufacturers, will not be inflationary for finished goods, including consumer products.
The Bank of Canada seems to be the only central banker acknowledging the inflation risks, which is a deviation from the G-10 central bank monetary policy stance. The Bank of Canada became the first G-10 central bank to suggest interest rates would rise sooner than expected, anticipating a rate increase in the second half of 2022.
They concluded that ongoing fiscal and monetary support, progress on vaccinations, and higher commodity prices would lead to 9.4% GDP growth in 2021, which would lift inflation to its targeted level in H2 2021.
What central bank is next? The Bank of England is in the running. They are expected to announce plans to taper quantitative easing purchases starting in July.
The G-10 “non rate hike” tenet is showing cracks, and its not from a plumber.