The Sunday Times May 22, 2022 9
BUSINESS
T
he cries of pain emanating
from the Citadel of Capitalism
should be music to the ears of
Federal Reserve Board
chairman Jay Powell, but don’t
expect him to say so and call
attention to the fact that bad
news for others is generally
good news for the Fed these days. More
than $7 trillion of wealth has been
wiped off the books of investors, which
should put a crimp in the spending
habits of the better-off Americans who
have been accounting for 32 per cent of
global sales of luxury goods.
Add the plunge in the value of
retailers’ shares in response to the
inability of Target, Walmart and others
to pass on cost increases by raising
prices and you have the prelude to the
new play Bottling the Inflation Genie,
which is replacing Inflation is Fun as
America’s star attraction.
Applause from the Fed. Slow clapping
from investors at the realisation that the
days of profit-protecting cost pass-
throughs are no more.
There are also signs that the balance
of bargaining power in the labour
market, although still favouring
employees, is becoming somewhat less
favourable to the take-this-job-and-stuff-
it crowd. Amazon has announced that its
warehouses are over-staffed. Uber chief
Dara Khosrowshahi tells his workers to
“treat hiring as a privilege”. Some
employers are emboldened to be more
insistent that staff return to offices. And
LinkedIn reports that an increasing
number of job offers are being
rescinded. Silent nodding of approving
heads in the Fed boardroom.
Powell says “there could be pain
involved” in bringing inflation down to
the Fed’s 2 per cent target. He believes
the current low level of unemployment
is no longer consistent with that goal,
and that “restoring price stability is non-
negotiable... We need to see inflation
coming down in a convincing way. Until
we do, we will keep going.”
The reasons to expect “pain” begin
with the American economy remaining
attached to the world around it — a world
in which treasury secretary Janet Yellen
sees “stagflationary effects”. The
Chinese economy is in deep trouble as
President Xi Jinping pursues his
maniacal “no Covid” policy that shut
down key international supply lines and
Chinese markets for everything from
German autos to Australian iron ore.
Russia’s economy is a shambles and
Putin has taken down the economy of its
Ukrainian neighbour, causing severe
shortages that are driving up wheat and
other food prices. Europe is paying a
high price for its reliance on Russian gas
and oil to keep its factories operating
and its citizens toasty warm. The US,
adds Yellen, “is best positioned to meet
these challenges”, but they are certainly
not making life easier for the Fed as it
seeks to minimise domestic suffering.
That affliction has produced a two-
year low in homebuilder confidence as
mortgage rates soar — a bad omen for
construction jobs and, for the Fed, a
welcome prod to American consumers
to rein in other spending. Many are
finding they are 15-20 per cent poorer
than they thought they were. Consumersentiment fell in May to its lowest level
since the 2008-09 Great Recession. Only
one in three believe their family incomes
will outpace inflation.
Gallup polls show that 40 per cent (up
eight percentage points) of Americans
fear they will be unable to pay their
normal monthly bills, and 52 per cent
(up seven points) will be unable to
maintain their standard of living, which
they are trying to do by cutting saving to
a smaller part of their incomes than at
any time in the past nine years.
Fortunately for the Fed, consumers
are using some of those savings, and
their post-Covid get-out-of-jail-free cards
on services, which put less of an
inflationary burden on the economy
than stuff (think, cars) affected by
supply-side bottlenecks. They are filling
airplanes, restaurants and hotels,Irwin Stelzer American Account
despite soaring fares, menu prices and
room rates — and they are doing so
without stretching their finances. Only
2 per cent of credit-card holders are
30 days or more behind on payments;
during the Great Recession, those
delinquencies came to 7 per cent.
Meanwhile, 57 per cent of American
chief executives surveyed by The
Conference Board anticipate a “very
short, mild recession” with inflation
coming down “over the next few years”.
Only 11 per cent predict a long, deep
recession. Former Fed chairman Ben
Bernanke foresees a period of slow
growth, a bit of a rise in unemployment,
and continuing inflation. “You could call
that stagflation,” he adds.
Powell has an ally in the strong dollar,
which is keeping the price of imports
down and reducing pressure on the
economy to produce goods for export.
Goldman Sachs estimates the dollar’s
strength and falling share prices have
already produced the equivalent of a
2.25 percentage-point increase in
interest rates, compared to the mere
0.75-point increase the Fed has ordered.
But there are more to come. Best fasten
your seat belt as Powell attempts to pilot
the economy to a soft landing — unless
he decides that storms force him to
return the plane to the hangar for a refit.
[email protected]Irwin Stelzer is a business adviserFasten your seat
belt as Powell tries
to pilot the US to
a soft landing
It has found it hard
to kill criticism
that QE was for the
Treasury’s benefit
T
he last time inflation, measured
by the consumer prices index,
was higher than the newly
reported rate of 9 per cent was
in March 1982, more than 40
years ago. Things were different
then. The unemployment rate
stood in excess of 10 per cent
and was on track to break through the
3 million mark. Inflation, though, at
9.1 per cent, was on its way down from
more than 20 per cent.
Perhaps that is why consumer
confidence, as recorded by the long-
running GfK survey, was higher then
than now. On Friday, GfK announced
that its consumer confidence index had
fallen to a record low of -40 as the cost-
of-living crisis bites. In March 1982,
despite economic uncertainty and rising
unemployment, the reading was -18.
There are other differences. These
days the unemployment rate is just
3.7 per cent — although that low figure is
partly due to the shrinkage of the
workforce, with employment lower than
before Covid. Most strikingly, while an
official interest rate of more than 13 per
cent was regarded as necessary to fight
inflation in March 1982, these days it
stands at just 1 per cent.
One big similarity, though, concerns
the Bank of England. In 1982, under the
governorship of Gordon Richardson, the
Bank was at loggerheads with the
government. It never bought into the
Thatcher government’s monetarist
approach and relations were not good.
The Bank only needed to bide its time;
even then, the writing was on the wall
for the monetarist experiment. But the
writing was also on the wall for
Richardson, who the following year was
replaced by Robin Leigh-Pemberton,
former chairman of NatWest and Tory
leader of Kent county council.
These days the Bank is again at
loggerheads, if not with the government
as a whole then certainly with many
Tory MPs and some unnamed cabinet
ministers. The jump in inflation to 9 per
cent and the current governor’s
admission that it feels “helpless” in the
face of inflation — and that “apocalyptic”
food price rises are in store — has
focused attention on Threadneedle
Street, and not in a good way.
The 25th anniversary of Bank
independence was not supposed to be
marked by mutterings from the
governing party that it might be no bad
thing to take back control, so to speak, of
interest rate decisions. They are only
mutterings — but we should remember
that, under the Bank of England Act
1998, the Treasury has reserve powers to
direct the Bank on monetary policy in
“extreme economic circumstances” if
deemed to be in the public interest.
The Bank, as is clear, should not be
immune from criticism; it has got some
things seriously wrong, including its
inflation forecasting. But we must be
very wary of moving beyond criticism to
enacting a change that would be
seriously damaging economically. There
is another example of this happening,
though I can’t quite put my finger on it.
The Bank’s defence is that even if it
had acted earlier last year in raising
interest rates and halting quantitative
easing (QE) — as many, including me,urged — it would not have made a big
difference to the current inflation surge.
We cannot know whether that is the
case, although it is reasonable for the
Bank to point to the lags in monetary
policy and the difficulty of tightening in
the depths of the pandemic, in the
second half of 2020 or early 2021.
A more telling criticism is that the
Bank, along with its peers abroad, was
prey to “groupthink”. No two crises are
the same, but the playbook adopted by
the Bank and other central banks was
straight out of the one adopted for the
global financial crisis in 2008-09. That
strategy — slash interest rates and launch
large amounts of QE — was right when
the economy faced a demand shock and
a damaged banking and financial system
more than a decade ago. But when the
problem was a supply shock, which
would be exacerbated as the world
economy recovered from the pandemic,
it was much more questionable. Lordalso a question about whether its softly-
softly approach on interest rates was
driven in part by concerns over the
government’s debt interest bill.
Bank of America’s London office, in a
critical note, warned of “growing
concerns” about the Bank’s approach.
Markets struggle to work out its “reaction
function” — when it will raise rates and
why — together with “a building
impression we have that monetary policy
may appear more politicised”. To avoid
upsetting the government, the Bank has
been “reluctant to talk recently about
one of the key supply shocks hitting the
UK, Brexit”.
These things can be improved. The
convention that the Bank cannot make
any assumptions about changes in
government policy, as other forecasters
do, should be dumped. Its forecast of
inflation topping 10 per cent later this
year assumed there would be no further
government action in response to the
cost-of-living squeeze.
In the meantime, we should forget
any talk of reversing the Bank’s
independence. That would be the surest
way to add a sterling crisis to the cost-of-
living crisis and generate a “buyers’
strike” for the bonds (gilts) that the
government has to sell to fund the
budget deficit. It would, in other words,
make a difficult situation much worse.PS
The return of the jokes last week met
with a rapturous reception, so I cannot
stop now. I am, however, relying on a
small number of people for material.
Riding to the rescue this week is
Baroness (Ros) Altmann, temporarily
turning her attention away from the
plight of pensioners. Inflation, she
reminds us, is cutting money in half
without damaging the paper. She also
recently met a young person who has
degrees in economics, politics and
psychology. He doesn’t have a job, but at
least he can understand why.
Continuing last week’s gym theme, an
older man with a paunch asks the trainer
which machine he should use to make
himself more attractive to women. After
looking him up and down, the trainer
says: “I’d suggest the ATM outside.”
Stay with me for this one, also from
Ros. An economics student is startled
when a frog calls out to her: “If you kiss
me, I’ll turn into a handsome prince.”
She picks up the frog and puts it in her
pocket. The frog, more insistent this
time, says that if she kisses him, he’ll stay
with her for a week. She smiles again
and puts him back in her pocket. The
frog gets even more agitated, saying:
“Why won’t you kiss me and turn me
into a handsome prince?”
She replies: “Look, I’m studying
business. I have no idea what it would be
like to have you as my boyfriend, but a
talking frog would be worth a fortune.”
Another regular to whom I am
grateful, David Lewis, managed to get a
full tank for only £22. “It was for my
lawnmower,” he admits.
Worried about the next crisis that
could befall us, he asked his local council
what they were doing to prepare for a
Dalek invasion. “We’re putting some
steps in place,” they told him.
[email protected](Mervyn) King, the former Bank
governor, is among those who have
made this point recently.
Had central banks not done this, it is
likely that we would still have had a post-
Covid inflationary shock, exacerbated by
the Russian invasion of Ukraine. But the
inflation peak would probably have been
closer to the 5 per cent that we saw in
2008 and 2011. It is only fair to say this is
with the benefit of hindsight. It seemed
the right thing to do at the time.
That is water under the bridge — and,
if it is of any comfort, so incidentally is
the big surge in inflation, with the rate
jumping from 1.5 per cent to 9 per cent
over 12 months. Inflation will be helped
in the coming months by so-called base
effects (prices were already rising
strongly a year earlier) and by some of
the oddities returning to normal.
Second-hand car prices, for example,
are now falling. And while inflation may
go a little higher later this year, it will not
be much above current levels, if at all,
and is still on course for a fall next year.
If we look at the Bank, it seems to me
the problem is not that it is independent,
but that it is not independent enough.
The decision to launch an aggressive QE
programme in March 2020 was, at least
in part, taken to improve the functioning
of the gilt market and to make it easier
for the government, which had an
unprecedented deficit to fund, to do so.
The Bank has found it hard to kill the
criticism that its pandemic QE
programme was initiated for the
convenience of the Treasury. There is... AND THERE’S MORE IN THE PIPELINE
Source: ONS90140 (2015 = 100)2012 2014 2016 2018 2020 221001101201301990 1995 2000 2005 2010 2015 20202486INFLATION IS AT ITS HIGHEST FOR DECADES ...
Source: ONSConsumer price in lationProducer input prices Producer output prices10%0David Smith Economic Outlook
If it’s hurting, it’s
good for the Fed
The Bank’s problem is not
being independent enough
around him in relation to the imminent
chief executive vacancy at M&G.When central banks get political
The timing isn’t ideal. On Monday, Bank
of England governor Andrew Bailey is
due to speak in Vienna on “The return of
inflation”. And on Tuesday, the Bank is
set to release the results of a second
round of climate stress tests looking at
the financial risks posed to big banks and
insurers from global warming.
Recent commentary has focused on
the politicisation of the Bank’s role by
MPs angry at runaway inflation. Liam
Fox, former defence secretary, accused
Bailey of “complete hyperbole” after he
warned of “apocalyptic” food price
rises. Environment secretary George
Eustice is said to have branded Bailey’s
language “entirely inappropriate”.
Get ready for debate about the Bank’s
politicisation of its own role, too. The
climate stress tests are overseen by the
financial policy committee rather than
the interest rate-setting monetary policy
committee. But some economists are
already muttering that Threadneedle
Street should be concentrating more onthe immediate risk of 10 per cent-plus
inflation and less on climate change.
The argument is more developed in
the US. The Federal Reserve has a dual
mandate: price stability and maximum
employment. Two years ago, it tweaked
the employment part to say it should be
“broad-based and inclusive”, on the
basis that a strong labour market has
benefits “particularly for... low and
moderate-income communities”. Never
mind the fact that the Fed did more than
any institution to fuel asset inequality in
the previous decade through super-low
rates and quantitative easing.
There have since been accusations
that the Fed, distracted by social issues,
has taken its eye off the inflation ball.
“We have a generation of central bankers
who are defining themselves by their
wokeness,” said former US Treasury
secretary Larry Summers last year.
It’s not a perfect parallel here, but it’s
not just climate change. The Bank has
taken stick for an “inclusive” redesign of
its logo and its relaxed work-from-home
policy. Expect more scrutiny of its
culture and remit as inflation bites.
[email protected]hundreds of thousands more sales
agents who increasingly use Zoom
rather than going door-to-door. Its
centre of gravity is China — ultimately
Hong Kong — and Vadera likes to say of
the fact that Wells’s successor will work
from Asia: “You can’t be half pregnant.”
Taken to its logical conclusion, that
raises questions over the Pru’s domicile,
which is still the UK. Changing it would
require approval from three quarters of
shareholders. Some 40 per cent of the
Pru’s investor base is in the UK, meaningT
his week sees the return of a
much-loved fixture in the City
social calendar, the Chelsea
Flower Show, and an event the
world had probably realised it
could do without, Davos. It will
also refocus attention on the
original blue-chip-with-an-Asia-
problem after weeks of talk about a
possible break-up of HSBC.
Prudential faces shareholders at its
annual general meeting on Thursday,
and it had better come bearing news on
its chief executive succession.
It was no surprise that Mike Wells, the
American who had run the insurer since
2015, decided to stand down this year.
He had overseen demergers of the Pru’s
UK arm, M&G, and its US one, Jackson
Financial, leaving it angled around Asia
and Africa. His work was done. But the
Pru seemed unready when Wells’s
retirement was announced in February.
Since he left in March, finance
director Mark FitzPatrick has been
running the insurer on an interim basis,
although he has ruled himself out for the
top job. Nic Nicandrou, the head of Asia
and Africa, is seen as the internalfrontrunner, which begs the question as
to why he wasn’t given the interim role.
The Pru wants its new man or woman
to be based in Asia. While it hasn’t
specified Hong Kong, that’s the location
of its regional headquarters. Hong
Kong’s nightmarish Covid restrictions,
which impose seven-day quarantine on
visitors and result in flight routes being
suspended when an aircraft brings in too
many infected passengers, won’t have
helped the recruitment process. That
hasn’t stopped growing City grumbles
about the lack of an update.
This is a key moment for chairwoman
Baroness (Shriti) Vadera, who has looked
less than sure-footed since she arrived at
the start of last year. And it’s not just key
in terms of the name she pulls out of the
hat. The details surrounding the Pru’s
next chief executive, including where
exactly they will be based, will say a lot
about the future of the business — and
whether it can continue to stretch
awkwardly between east and west.
The insurer, founded 173 years ago in
London’s Hatton Garden, now employs
fewer than 200 people in the UK. But it
has 13,000 staff in Africa and Asia, plusUnderperforming Pru
FTSE 100 Prudential-30-20-40-10010%Source: Capital IQJan Feb Mar Apr Maythere would be a round of bloody forced
selling were it to move to Hong Kong.
But it is not impossible in the medium
term. Since 2019, the Pru has been
regulated there. An increasingly
autocratic Beijing may encourage a
decision at some point. And as HSBC has
found with its biggest investor, Ping An —
and the Pru already knows from its
activist Third Point — shareholders like
clarity. Keeping the Pru’s domicile in the
UK while moving its chief executive to
Asia may not count as half pregnant, but
is at least a quarter in the pudding club.
Communication with the City has
been patchy. The Pru said it would
demerge Jackson by the second quarter
of last year but it slipped into the third.
Some investors were confused by the
rationale for a $2.4 billion (£1.9 billion)
equity issue in Hong Kong in September,
which was announced on a Saturday.
Vadera, 59, has an opportunity to
sharpen the message this week. The
market needs news on a chief executive,
and it needs context. If it’s not going to
be Nicandrou, 56, more succession
planning may soon be required;
headhunters are said to have sniffedOliver Shah
Woman from the Pru must pull a
rabbit out of the Hong Kong hat