By Michael O’Neill
“Ain’t got no distractions
Can’t hear no buzzers and bells
Think they have the answers,
Don’t believe that they would fall
Those deaf, dumb, and blind bankers
Sure, play a mean monetary policy pinball”
The Who’s Pinball Wizard, Tommy, was a deaf, dumb, and blind kid who dazzled pinball players from Soho down to Brighton in 1969.
Fifty years later, the members of the 2021 Federal Open Market Committee (FOMC) are trying to bamboozle investors from Soho (in Manhattan) to Brighton (Michigan) and all points of the compass from there. The policymakers share two of Tommy’s key attributes. They appear to be deaf to claims they behind the curve and blind to the environment outside their offices. But they are not dumb.
Even a flock of magpies find them noisy.
The FOMC met on April 27 and 28. Since then, policymakers have nearly broken the internet expounding views on inflation, employment, the COVID-19 pandemic, and why those who disagree with their view are wrong.
Lawrence Summers is a fellow who thinks the Fed is wrong. He was the Clinton administration Deputy Treasury Secretary from 1995-1999, then-Treasury Secretary until 2000. He followed that up as Director of the White House National Economic Council for President Obama. Mr Summers is a smart fellow, and he isn’t buying what the Fed is selling.
Three months ago, Mr Summers said that the Fed may be forced to raise interest rates as early as next year.
He blames the Biden administrations $1.9 trillion fiscal stimulus plan, saying too much cash will cause inflation. He warned the Fed could face a repeat of the 1970s, when it let inflation get out of control.
Mr Summers was at it again last week, after the US recorded 4.2% m/m inflation in April. He repeated, “given the commitments the Fed has made, administration officials’ dismissal of even the possibility of inflation, and the difficulties in mobilizing congressional support for tax increases or spending cuts, there is the risk of inflation expectations rising sharply.”
Mr Summers escalated his criticism of the Fed on May 18. He told the audience at a conference hosted by the Federal Reserve Bank of Atlanta Policy that Fed “projections suggesting that rates may not be raised for . . . close to three years are creating a dangerous complacency.”
Fed Chair Jerome Powell was asked about Mr Summer’s critiques during his April 28 press conference., specifically about the references to 1960’s and 70’s inflation.
Powell replied, “And I would say, if I may, that is a principal difference from—we’re all very familiar at the Fed with the history of the 1960s and ’70s, of course. And we know that our job is to achieve 2 percent inflation over time. We’re committed to that, and we will use our tools to do that.
So that’s a very different situation than you had back in the 1960s—or many, many differences, actually.”
He didn’t quite say “things are different this time,” but the old walking, duck, quack adage has merit.
“things are different this time” Photo: Pixabay
The other FOMC voting members agree with Mr Powell. San Francisco Fed President Mary Daley said she believes the current policy stance is perfect. Board of Governor member Lael Brainard said the employment report showed the value of patience. Vice Chair Richard Clarida expressed surprise with both the employment and CPI reports. At the same time, Atlanta Fed President Raphael Bostic insisted, “now is not the time where we have to consider moving.”
Yet, the minutes of the April 28 meeting suggest a different story. The April 28 minutes may be signalling the Fed will soon start tapering bond purchases, a precursor to higher interest rates.
The statement noted, “A number of participants suggested that if the economy continued to make rapid progress toward the Committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.”
Inflation was a concern, and despite many Fed policymakers insisting inflation increases were “transitory,” “a couple of participants commented on the risks of inflation pressures building up to unwelcome levels before they become sufficiently evident to induce a policy reaction.”
The market reaction to the minutes is more Larry Summers than it is Jay Powell or to paraphrase Pinball Wizard, Jay thought he was the Fed king, but he just handed his
pinball crown to him.