Among the many rather unpleasant contemporaries one encounters in life, the party crasher is a particularly unpleasant appearance. At first, he stands seemingly indifferent on the edge of the dance floor and turns off the music system exactly as the atmosphere around him peaks.
This is exactly how William McChesney Martin, then head of the US Federal Reserve, described his role in 1955: the job of the common central banker is to “pull out the punch bowl just when the party really starts.” In other words, to prevent the economy from overheating, triggering a dangerous wage-price spiral and ultimately triggering a real economic hangover, the Fed must intervene in time, for example by raising key rates.
66 years after Martin’s famous speech, the United States may be precisely at this threshold: unemployment is falling, the rate of inflation is rising – both fueled by government aid amounting to nearly five trillion dollars. dollars (4.300 billion euros), which Congress received after the outbreak of the Corona pandemic. And what about Fed Chairman Jerome Powell? Instead of slowly heading to the beverage table, he has so far hoped that the inflation wave will subside on its own again with consumer prices rising 5.4% recently.
Even more left-wing economists like ex-Treasury Secretary Lawrence Summers, who usually have the money in their pockets, have their doubts: “The concept of the Fed this time around is obviously that it doesn’t want to go. grab hold of the staggering drunken punch bowl, ”Summers said weeks ago.
The information situation is confused
Now central bankers should be told that the information situation is confused: very good economic data alternates with bad, many companies are desperately looking for staff, while at the same time the number of people in employment is still several million below the figure before the outbreak of the pandemic. The Fed therefore argues that it has not yet achieved its objective of price stability and maximum jobs. Therefore, economic aid could expire slowly at best. Critics, on the other hand, are calling for a quick change of course. This is intended to prevent inflation from spiraling out of control and ultimately causing the central bank to brake even more drastically.
The Fed is therefore taking a risky bet with its wait-and-see strategy. If your analysis turns out to be correct, the United States and therefore also the world economy could even emerge stronger from the Corona crisis. States like the Federal Republic of Germany, whose economies depend heavily on exports, would also benefit. Otherwise, however, the consequences could be dramatic: if the central bank were to pull the emergency brake in the face of a further rise in prices and raise interest rates faster and more sharply than expected, it could trigger a global economic crisis with high unemployment and loss of prosperity, against which the corona recession was a light breeze – also in Germany.
Powell provided the first information on how the Fed is expected to proceed on Friday at the annual closed-door meeting of central bankers around the world, which, due to the pandemic, has again unfolded virtually, not in the world. scenic Jackson Hole at the foot of the mighty Grand Teton Mountains. The Fed chairman stressed that inflation was in sight and that if the negative trend consolidates, he “will respond with certainty”. But conversely, experience shows that central banks would do well to ignore temporary price fluctuations. “To do the same here can do more harm than good,” said Powell. He hinted that later this year the Fed may start phasing out massive purchases of government bonds and mortgage-backed securities, which are designed to keep long-term lending rates low and their cost $ 120 billion per month. The prerequisite, however, is that the decline in unemployment figures continues in the coming months and that the Fed is approaching its target of full employment, said the head of the central bank.
Loans could become more expensive again
His announcement could mean the US economy and consumers will once again have to adjust to slightly higher borrowing costs in the medium term. Powell stressed, however, that a direct hike in the key rate should not be expected at this time. Among the factors of uncertainty that are slowing the economy and could change the course of the Fed again, he included the delta variant of the corona virus, which also drastically increased the number of people infected in the United States.
Whatever the outcome, the governor of the central bank faces two problems. On the one hand, the Fed must admit that it partially misjudged the economic and political situation. They therefore surprised government aid by their massive size as well as by the significant increase in rents and salaries. After the wave of layoffs last year, many companies have to offer bonuses and high starting salaries, even in simple jobs, in order to find the employees they urgently need. The other price factors are delivery bottlenecks and insufficient supply, for example for semiconductors and cars, which the Fed cannot do anything about.
Pigeons and falcons
Second, Powell must set up the Fed’s 18-member monetary policy committee, which is divided into three camps of roughly equal size. On the one hand, there are the so-called “pigeons” who argue that unemployment, especially among the elderly, women, low wages and social minorities, is still far too high to end the policy. Support. The Fed should therefore neither end its purchases of securities, much less end its zero rate policy.
In front of them are the “hawks” who warn that sharp price increases could permanently modify the inflation expectations of employees and companies and thus trigger the dangerous spiral of prices and ever higher wages. Above all, the Fed must drastically reduce purchases of mortgage-backed securities because these push up real estate prices, which are already skyrocketing.
Powell and a handful of other “centrists” must strike a balance between the two wings because, in the end, the Fed cannot do both: buy and not buy stocks, raise interest rates and not. increase them. At the same time, a compromise must not appear helpless or lukewarm, otherwise turbulence in the financial markets threatens.
Adam Posen, director of the Peterson Institute for International Economics in Washington, advises the central bank to find common ground: “The inflation problem is bigger and will keep us busy longer than the Fed assumed – and yet it should not come into action. , explains the economist. He expects that by the end of 2022, full employment will be largely again and the current price gusts will have abated. If it were then still necessary, the Fed could raise its key rates, if necessary significantly.
Like little children
From Posen’s point of view, however, the central bank should start exiting securities purchases soon – if it carefully accompanies the move in terms of communication. From an economic point of view, such “tapering” will hardly be felt, but politically, it is of course a strong signal that the era of cheap money is slowly coming to an end.
The Fed’s goal is to avoid a so-called “tantrum tap” like in 2013. At that time, after overcoming the global financial crisis, Powell’s predecessor, Ben Bernanke, had already announced the release of a program to buy securities – and thus triggered panic in the financial markets: bond interest rates have skyrocketed, stock prices have fallen. Typing Tantrum, as the short-circuiting reaction of stock traders in the world of monetary politicians has since been called, cannot be translated literally. Rather, it is an allusion to the tantrums and tantrums of other people on earth that fellows sometimes remember with their occasional simplicity: little children.