DEDUCED RECKONING: Federal Reserve Chairman Jerome Powell has inflation in crosshairs

Last week, Jerome Powell was approved for a second four-year term as chairman of the Federal Reserve Board by a Senate vote of 80-19 despite the rancorous mood in Congress these days. On May 17, Powell granted a 35-minute interview to the Wall Street Journal’s  chief economics correspondent Nick Timiraos that is available online.

At the time Powell was elevated to his post, the United States was still enjoying its longest-ever economic expansion of 10 years, 8 months. The economy was near full employment with very low inflation of barely 2%. COVID brought all of that to an abrupt end. President Donald Trump decided in March 2020 to essentially close the economy. Overnight we went from 3.5% unemployment to 14.7%, just two months later. The stock and bond markets froze up in March 2020 as the economy went over that cliff of uncertainty The Fed was forced to become a backstop of last resort for every single asset class. In doing so, it rapidly built its balance sheet to trillions of dollars. Coupled with $3 trillion in federal relief packages during the Trump years plus another $1.9 trillion just after Joe Biden became President, inflation began to zoom.

Over a period of about 30 years our global supply chains became so efficient that just-in-time inventory concepts were developed to reduce the cost of carrying inventory in stock to meet demand for just about everything.

When COVID arrived, supply chain issues were most glaring in the quest for simple staples like bleach and toilet paper. Over the last 25 years, the bulk of semiconductor manufacturing had moved offshore to China and Asia. The lack of adequate semiconductor manufacturing in the United States caused cars to be stockpiled outside of plants awaiting the arrival of those precious chips for completion. That sent new and used car prices soaring, a big factor in recent inflation numbers. Putin’s war against Ukraine has now disrupted energy prices and disturbed normal flows of wheat and other commodities provided to the world by Russia and Ukraine.

Powell believes that we are in a unique economic position. Unemployment remains near all time lows. Two jobs are available for everyone one person unemployed. Supply chains are still disrupted. Prices for everything are zooming now as wages rise for the first time in years but not as fast as the price of an apartment to rent or to fill your car or to buy groceries. Inflation hurts people with lower incomes more than the wealthy who have the resources to keep shopping. Retail sales have slowed but were still up 0.9% in April. People have reconsidered a new work/life balance and many have moved to other cities or do not want to go back to commuting to an office.

There is a point of view that inflation peaked last month. Mortgage rates at 5.5% are slowing the housing market. Some commodity prices have already fallen fast. Lumber has dropped from $1,500 per thousand board feet in May 2021 to less than $800 this week. Used car prices are also falling back. All may be the result of higher interest rates so far.

Powell insisted that “restoring price stability is the bedrock of our policy."

"We know that this is a time for us to be tightly focused on the time ahead and getting inflation back down to 2%," Powell said on Tuesday in an interview at the Wall Street Journal's Future of Everything event. "No one should doubt our resolve in doing that ... What we need to see is inflation coming down in a clear and convincing way."

Joan Lappin CFA has been called an “investment guru” by Business Week and a “top manager” by the Wall Street Journal. The Sarasota resident founded Gramercy Capital Management, a registered investment adviser, in 1986. Email JLappincfa@gmail.com. Follow her on twitter: @joanlappin. Her past columns appear at heraldtribune.com/business/columns.

This article originally appeared on Sarasota Herald-Tribune: JOAN LAPPIN: Fed Chairman Jerome Powell has inflation in crosshairs