Commentary on Political Economy

Wednesday 10 November 2021

 US inflation hits new record

 Fed to rethink its strategy

Stephen Bartholomeusz

The thesis underpinning the US Federal Reserve Board’s monetary policy strategy is being severely challenged by the actual data. 

Through this year, as inflation rates in the US pushed to levels not seen for 30 years, the Fed, led by chairman Jerome Powell, has insisted that the increase in prices was “transitory,” a function of the pandemic, and would subside as the economy normalise

Even as inflation numbers remained at those three-decade highs, unemployment levels fell and the economy showed strong growth, the Fed maintained that broad thesis as it prepared for an orderly and cautious exit from its expansive response to the pandemi

The high inflation rate may force Fed chair Jerome Powell to reconsider the US central bank’s next mov

The high inflation rate may force Fed chair Jerome Powell to reconsider the US central bank’s next move.CREDIT:BLOOMBER

The Fed is scheduled to begin “tapering” its $US120 billion-a-month ($164 billion-a-month) purchases of bonds and mortgage securities this month and end the program entirely by the middle of next yea


Powell has made it clear that the Fed won’t contemplate raising interest rates – the so-called “lift-off” – until it has ended the asset purchases. Minutes of recent Fed meetings show most board members don’t anticipate a rate increase until 202

But Wednesday’s inflation numbers may force the Fed to reconsider the pace at which its monetary policy evolve


On the climb: petrol prices


Biden's White Hous

Surprise inflation jump disastrous news for Joe Biden and Democrat

The US inflation rate for October came in well above market expectations at 0.9 per cent, or 6.2 per cent on a year-on-year basis – the highest rate since mid-1982 and an acceleration from September’s 5.4 per cent

Core inflation (excluding fuel and food) rose 0.6 per cent in the month and 4.6 per cent year-on-year, the largest rise since 1990

Disconcertingly for the Fed, where the surge in inflation earlier this year was concentrated in the sectors most affected by the pandemic and then the re-opening of the economy, the base of price growth now seems to be broadening. Rising inflation is becoming baked in as the accelerating increases in prices for goods and services are being passed on and are also being reflected in wages rising at rates not seen since the early 1980


The disruptions to supply chains that are a key driver of the burst of inflation show no signs of being resolved. Neither do energy costs, which have roughly doubled over the past year to the $US80-plus a barrel of oil levels last seen, briefly, in 201

The dilemma for the Fed is the knowledge that the supply chain bottlenecks should eventually be cleared. There is also the prospect that OPEC (and/or US shale producers) might increase oil production sufficiently to produce a more even balance of supply and demand in energy market

The acceleration in inflation will inevitably force the Fed to at least consider whether it will need to speed up its exit from quantitative easing and/or bring forward the first rate ris

The risk is that if the central bank waits too long for those things to happen, it might lose control of inflation and self-fuelling inflationary expectation

It’s not surprising that financial markets have taken matters into their own hand


The five-year “break-even rate” – the difference between the yields on inflation-protected bonds and conventional Treasuries with the same duration, which reflects market expectations of future inflation – widened 14 basis points to a record 3.13 per cen

The yield on two-year notes jumped 9 basis points to 0.52 per cent as the US yield curve flattened in expectation that the Fed will be forced to move ahead of its schedule and truncate the post-pandemic rebound in economic growth in the proces

‘Taper tantrum

The acceleration in inflation will inevitably force the Fed to at least consider whether it will need to speed up its exit from quantitative easing and/or bring forward the first rate rise in this cycle to next year

The October inflation numbers shocked the bond market but only rattled equity markets, with the S&P 500 falling just 0.82 per cent. The more rate-sensitive Nasdaq market, laden with high price-earnings ratio technology stocks, fell 1.66 per cen

Should the Fed’s hand be forced, the likelihood is that there’d be “taper tantrums” – more substantial sell-offs – in both bond and equity markets. The more entrenched the higher inflation levels become, and the longer the Fed waits to respond, the more violent the markets’ responses might b

The Fed’s decision-making is complicated by US President Joe Biden’s ambitious agend

Having just gained Congressional approval for his $US1.2 trillion infrastructure spending package, the White House is now trying to negotiate the even more difficult route to approval for its proposed $US1.75 trillion of social and climate-related spendin

Powell’s predicame

If that approval can be gained – and the divisions even within Biden’s own party make that problematical – the US would be pouring fiscal fuel onto the already flaring inflation rate


Powell’s predicament is also complicated by the fact that his position at the Fed is up for grabs, with his term scheduled to end in February. Biden interviewed both Powell and another highly-regarded Fed board member, Lael Brainard, at the White House last wee

If Powell isn’t granted a second term as chair, Brainard, favoured by the progressive elements among the Democrats – and the markets – was seen as the obvious and uncontroversial choic

She is, however, also seen as even more “dovish” and more unlikely to accelerate the taper or support an early rate rise than Powell and is therefore perhaps not the ideal candidate to deal with a sustained burst of inflatio

The outbreak of inflation at levels not seen for decades isn’t, of course, confined to the U

Data also released on Wednesday showed that factory-gate inflation in China hit 13.5 per cent last month – its highest level since 1995 – as the supply chain issues, the country’s energy crisis and soaring commodity prices (which have since peaked) raised fears of stagflation, or high levels of inflation and low economic growt

Similar pressures from the supply chain disruption and higher energy and food prices are affecting central and eastern Europe and much of Asia and, to a less dramatic extent, Australi

There is some irony in the markets’ and central bankers’ fears of an inflationary spira


There is a push from the progressives for Powell to be replaced by another Fed board member, Lael Brainard, a Democrat who has been critical of the Fed’s relaxation, during Powell’s term, of the tough rules imposed on banks after the 2008 financial crisis


Federal Reserv

Biden dithers as the world waits for the most powerful central bank to be remad

Stephen Bartholomeus

Stephen Bartholomeus

Senior business columnis

Before the pandemic, their biggest concern was the absence of inflation in the post-financial crisis era, with a lot of research, analysis and head-scratching by central bankers and economists looking into its absence and into ways to spark price growth.

It now seems you can have too much of a good thing. The new conundrum is how to manage inflation down without destroying the post-pandemic rebound in economic growth in the process.

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