Fed Resists Pressure to Hike Rates

Today on TAP: Will this be sufficient for Biden to reappoint Jerome Powell as Fed chair?

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With many financial commentators pressing for rate hikes based on supposed market expectations and inflationary pressures, Jerome Powell gave them an economics lesson.

Speaking at a press conference this afternoon, following the two-day meeting of the policy- setting Federal Open Market Committee, Powell explained that the central bank would be starting to modestly reduce its bond purchases, but would keep interest rates close to zero.

The reason, he explained, is that the economy is still not in full recovery or at maximum employment. GDP growth and job growth slowed in the third quarter due to the COVID surge, he explained. And price increases are not the result of excess demand, but COVID-driven “supply constraints and bottlenecks.”

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Therefore, raising interest rates anytime soon would make no sense. “This is not a classic trade-off between inflation and unemployment.”

At the press conference, one financial reporter after another pressed Powell on the inflation risk, and on people supposedly staying out of the job market holding out for higher wages.

“People are staying out of the job market because of caretaking and because of fear of COVID,” he correctly countered. Paradoxically, inflation will come down as COVID subsides and the recovery strengthens, because workers will have the confidence to rejoin the job market.

I have been a critic of Powell because he is weak on financial regulation and too casual on conflicts of interest in investments by senior Fed officials, including his own. But on monetary policy he is superb, pushing back against both the conventional wisdom and the Fed’s usual bad habit of strangling recoveries.

I remain skeptical about whether his monetary dovishness would continue if Republicans took over Congress. But today, Powell gave Biden what he needs if he chooses to reappoint the beleaguered Fed chair.

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