Hike rates

Fed resists pressure to hike rates

While many financial commentators were pushing for rate hikes based on supposed market expectations and inflationary pressures, Jerome Powell gave them a lesson in economics.

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

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

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

At the press conference, one financial reporter after another pressed Powell about the risk of inflation and the people expected to stay out of the workforce who expect higher wages.

“People are staying out of the job market because of care and fear of COVID,” he correctly retorted. Paradoxically, inflation will decline as COVID subsides and the recovery strengthens, as workers gain the confidence to join the job market.

I criticized Powell for being weak on financial regulation and too flippant about conflicts of interest in investments by senior Fed officials, including his own. But on monetary policy, he is superb, pushing back both conventional wisdom and the Fed’s usual bad habit of strangling recoveries.

I remain skeptical whether his monetary accommodation would continue if Republicans took control of Congress. But today, Powell gave Biden what he needed if he chooses to reappoint the beleaguered Fed chairman.