According to Jerome Powell, the chairman of the Federal Reserve, the inflation that’s currently rippling through markets is likely to be only temporary. Powell testified before Congress on 22 June, arguing in his usual unruffled and unfazed manner that the recent spike in inflation was largely due to bottlenecks and other unusual supply-demand dynamics related to the re-opening of the US economy after the coronavirus shut-downs.
California, one of the most strident pro-lockdown states of all, recently lifted most of its restrictions, and James Corden and Ariana Grande have released a celebratory end-of-lockdown song and dance video.
There is a palpable feeling in America that the worst is well and truly over, especially as more and more people get vaccinated against coronavirus. Governor Cuomo in New York recently told reporters that if people had been vaccinated they should no longer worry, whether or not other people around them had also been vaccinated.
America, then, is moving on.
But as Jerome Powell’s testimony to Congress made plain, the after-effects of the crisis are likely to linger on. His confidence that the inflation spike is or will be temporary was not shared by some of his Republican interlocutors, and there was equal scepticism on the matter of employment.
The twin mandates of the Federal Reserve are to keep inflation and unemployment down.
And as one Republican pointedly stated, the recent track record on both has not been good. Consumer prices jumped 5% in May, the largest year-on-year increase in 13 years, while unemployment remains stubbornly high in spite of the nine million unfilled job openings available across the US.
Mr Powell’s interlocutors were willing to concede that President Biden’s multi-trillion dollar stimulus packages are a major cause of inflation, and that government incentive schemes to encourage workers to stay at home are a significant factor in keeping those job vacancies unfilled.
Be that as it may, it all points to an economy that’s not exactly firing efficiently, and which Jerome Powell is mandated to answer for.
It was pointed out to him that he had predicted that more job vacancies would be filled than actually were for both of the preceding two months, and further that in spite of his pronouncements that the spike in inflation would be temporary, previous predictions had denied that there would be any inflation at all.
So how far is the Fed really in control, or even aware of the real dynamics at work in the US economy?
The answer to that really depends on which faction of economists you’re aligned to. Proponents of modern monetary theory argue that money printing has successfully stimulated the US economy for years now, at very little cost. Opponents point to the huge asset inflation that’s taken place, and argue that that inflation is now seeping through into the consumer price arena too.
It’s an argument that’s been running for some time. But it won’t go on for ever. Sooner or later proponents of MMT will either be proved right, inflation will drop away, and a regime of modest interest rate rises will be introduced - or they’ll be proved wrong, inflation will snowball, and interest rates will suddenly soar.
If that second scenario plays out, it won’t just spell trouble for consumers and businesses. It will also spell doom for the US government which, to combat coronavirus, has borrowed more money than at any time since World War Two. If the interest on that goes up to or beyond 10% - a rate not unusual during the inflationary times of the 1970s, then the US government struggle with its debt servicing. One solution would be to inflate the debt away, but 1920s Germany offers a cautionary tale about that sort of strategy.
Another would be drastically to cut US government spending, anathema to at least one, if not both political parties. Neither scenario is at all palatable, which is why Jerome Powell and his adherents are calmly maintaining that MMT will work, and blithely continuing on the current path.
Will they be proved right? Hard to say – it may yet turn out that James Corden and Ariana Grande are premature in their desire to start dancing in the streets.