Bloomberg Businessweek - USA (2020-10-12)

E C O N O M I C S

28

Edited by

Cristina Lindblad

FederalReserveChairJeromePowellhasdone

everythingtodemonstratehisdesireforhigher

inflationshortofdressingupasa doveandcoo-

inginfrontofFedheadquarters.InAugusthe

unveileda policythatnotjusttoleratesbutseeks

periodsofinflationabovetheFed’s2%target.

“Thelabormarketisrecovering,butit’sa long

way—alongway—frommaximumemployment,”

Powellsaidata FederalOpenMarketCommittee

pressconferenceinSeptember.Askedwhether

theFedwantstogetunemploymentbackdown

to3.5%orbelow—adegreeoflabormarkettight-

nessthatpreviousFedchairsfearedwouldsetoff

spiralinginflation—hesaid,“Yes,absolutely.”

Powell’spro-inflationmessageisn’thavingthe

intendedeffect,though.TheFed’slowrateshave

pumpedupthestockmarket.Butif thefinancial

marketsweretakinghimathisword,long-term

interestrateswouldbeleapingtocompensate

investorsforhigherinflation’simpactonthe

purchasing power of their bonds’ coupon pay-

ments. Not yet: The yield on the 30-year Treasury

bondis stilljust1.6%,upfrom1.4%thedaybefore

Powell’s Aug. 27 speech atthisyear’svirtual

version of the annual central banking confer-

ence held in Jackson Hole, Wyo. A yield that low

implies that either investors don’t think Powell

can achieve 2% inflation, or they’re resigned to

30 years of negative inflation-adjusted returns.

Either possibility is depressing.

Inflation that’s chronically too low remains a per-

plexing challenge for central banks, which have an

easier time fighting inflation that’s too high. If Powell

can’t convince consumers, companies, and inves-

tors that the Fed can raise inflation, bad things could

happen. A Japan-like deflationary psychology could

set in as households and businesses put off buying

big-ticket items—whether cars or machine tools—in

the expectation that prices will fall. What’s more,

low inflation and soft demand for loans have com-

binedtopushinterestratestothefloor,whichrobs

theFedofitsNo.1 toolforfightingrecessions.It

can’tcutinterestratessignificantly because they’re

already about as low as they can go. PHOTO ILLUSTRATION BY 731; PHOTOS: GETTY IMAGES (7); RIGHT, FROM TOP: FEDERAL RESERVE (2); US TREASURY; FEDERAL RESERVE BANK OF DALLAS

Hasthereeverbeena lessinflation-fearingFed?

When Hawks Cry