Jerome Powell’s Big Problem Just Got Even More Complicated
The Fed aims to avert financial instability while also fighting inflation — predicaments that frequently call for opposite policies
By Nick Timiraos, The Wall Street Journal, June 12, 2023
Federal Reserve Chair Jerome Powell finds himself in a place no central banker wants to be: working to avert a credit crunch, which calls for looser monetary policy, while fighting high inflation, which demands the opposite.
Strains in the banking industry, which followed the collapse of three midsize lenders this spring, help explain why some central bank officials are leaning toward holding interest rates steady at their meeting this week—even though the economy and inflation haven’t slowed as much as they expected…
One risk is timing: if inflation becomes entrenched in public psychology, becoming self-perpetuating, that could force the Fed to hold short-term interest rates higher for longer… [end quote]
And the longer interest rates stay high, the more danger banks and zombie companies will be in.
The Fed created a “facility” to shore up banks after the crisis a few months ago. The banks held Treasuries which are safe so the Fed can lend using them as collateral. But corporate debt is a different story.
I think that Fed Chair Powell will do what he has reiterated: he will fight inflation regardless of economic pain.
I predict a hold, with language about how they’re “watching closely” or similar. It’s not just the bank instability, there are enough “green shoots” (to mix a metaphor) to make it reasonable to sit tight for a month. If, as is so often written, it take 12-14 months for a Fed policy to work its way into the economy, well, we’re coming up on that, so maybe a teensy bit of wait-and-see is in order, especially since the Fed doesn’t want to be blamed for a recession during the election season next Spring.
More layoffs than in just tech. But this really is not about labor. Meaning labor is in an excellent position. This is about assets.
The wealth effect in the stock market is inflationary. The boomers need to understand some of the boomers hold equity that causes a lot of the inflation. It wont be at some point this year as the market slides again.
Millennials picking up equity are holding it longer term. Boomers are spending down savings non stop to live. The irony here the FED creating higher rates. The boomers have fewer and fewer assets to avail of those rates. This is actually all good for the saving and earning Millennials.
At first I was indignant that you asked. In my response I began to realize the value of the question. I thought the summation of mine was very obvious but even people with econ training do not see around corners at times.
Here are a few articles. At least one is behind a paywall. The topic on this board with this demographic deserves discussing. Remember the savings levels fully reflect supply side economic outcomes. The seniors get the lion’s share of all social spending and it may not be enough.