By Michael Every of Rabobank
Yesterday’s Daily, Grauniad-style, mixed up the linear order of Mel Brooks’s ‘The History of the World Part I and II’. However, its core arguments that: (1) inflation is more complicated than “it’s demand!”, which it clearly isn’t, or “it’s supply!”, which it also clearly isn’t; and (2) that US firms are collectively raising prices because they can, and then workers are trying to match via higher wages, gets things in the right order. Linking that argument and typos, while Bloomberg covers yesterday’s hawkish semi-annual testimony as ‘Bond Traders Fear Powell Willing to Break the Economy’, I would say the key message was actually, “If it ain’t Bork-en, don’t fix it.”
Bloomberg was talking about further repricing of Fed Funds futures higher and the US yield curve flatter that followed Powell (indirectly) flagging that not only could Fed funds indeed hit 6% this year, but that a step back up to a 50bps move again is a real possibility in March. ‘Who knew?’, says the guy mocking disinflation and pivot calls since the start of the year. And as our also never-timorous Fed watcher Philip Marey argues in ‘Be prepared’, this Friday’s payrolls report and then Tuesday’s CPI print will determine whether we get a 25bps or 50bps hike at the March 21-22 FOMC meeting. Moreover, he adds:
“For those who are getting fear of heights, we would like to point out that a 6.0% federal funds rate may seem high, but when core CPI inflation stands at 5.6%, it is only barely positive in real terms. In fact, the current real federal funds rate is still negative. More importantly, if we look at interest rates that are relevant to aggregate demand, a 10-year US treasury yield of close to 4% is still a negative rate in real terms. So what is all this talk of a restrictive monetary policy stance?
And who is still afraid of heights? In fact, if longer term interest rates remain too low to slow down the economy and squeeze inflation out of the system, the federal funds rate may even have to go higher than most of us can currently imagine. A federal funds rate of 7 or 8% may seem incredible right now, but how long ago was it that 6% seemed impossible?”
My “Bork-en” comment refers to the legacy of US jurist Robert Bork, who believed bigger was always better in firms for consumers, and who set the tone for a generation or more of neoliberal refusal to act on US anti-trust ‘because lower prices’. His argument always made as much sense to me as the Swedish Chef –“We poot de oligooopoly in de pooot… we get de leew inflootion in de poot… bork, bork, bork!”– but I wasn’t setting US regulatory policy, just watching The Muppets. Now we have such concentrated corporate power that large firms can collectively raise prices when supply shocks give them cover, and are able pay higher nominal wages too. So, roughly, +10% on commodities > +10% on shelf prices > +7% on wages = +10% in nominal sales growth with a little consumer credit…. and let the economists and central banks worry about the ‘real’ problem.
Bloomberg says markets fear Powell will see the economy broken, and indeed oil, stocks, short-dated Treasuries (2-year yields hitting 5% for the first time since 2007), and non-dollar FX plunged as he spoke, so he hit all his ducks except the US long end (for now). Yet what stocks should fear is things being fixed so they aren’t Bork-en, which involves smashing corporate concentration like crypto was. The oligooopoly argument means there isn’t any other choice if you want to bring inflation down and keep it down. Otherwise, firms can continue to collectively raise prices every time supply shocks give them cover – and such supply shocks are here to stay.
Breaking up corporate concentration is not a process monetary policy can drive, even via a deep V-shaped recession: such a downturn could even increase corporate power as smaller firms go under. What is needed is a grinding process of antitrust de- and re-regulation. Yet from the Fed’s perspective, it still implies very high rates for a very long time: the latter still seems to be confusing markets, who have only just woken up to the former.
Of course, some see supply shocks are over, which would help central banker: but I disagree. For example, the RBA tried to please mortgage holders yesterday by dovishly hiking 25bps to 3.60% and saying “inflation had peaked”. As flagged ahead of time, such a ‘pivot’ already looks silly given what Powell just said: yet Governor Lowe followed it up with a speech today saying he is close to a pause and won’t follow the US lead. A$ is responding as one would expect, now down at 0.6588 (and heading to its recent low of 0.6199?), helping to push imported inflation up.
The concentrated power of mortgages was underlined by the Sydney Morning Herald’s and The Age’s shocking early Tuesday front pages –“Red Alert: War Risk Exposed” and “Australia ‘must prepare’ for threat of China war”, which former Aussie PM Keating attacked as “the most egregious and provocative news presentation of any newspaper I have witnessed in over fifty years of active public life.”– both switching to cover the extra 25bps on monthly bills, or rents, ‘because landlords can’. Indeed, The Age flipped to noting “Lowe to meet mental health body as home-owner stress rises” But that five national security experts claim Australia could find itself at war with China within three years, is totally unprepared for it, and is being misled about this fact by its leaders, suggests supply-side inflation, and demand-side to Das Boot, will linger longer than Lowe will admit.
So does the fact that concentrated corporate power is one of the key reasons another report says the US is not fit for a Great Power struggle; and that just as China’s new foreign minister yesterday warned the US and China could face “confrontation and conflict” if the White House does not change course away from “all round suppression and containment.” Leland Miller of @ChinaBeigeBook yesterday went so far as to state on CNBC that policymakers and businesses need to take the tail risk of a “catastrophic” confrontation over Taiwan seriously, that contingency measures need to be taken urgently, and “if you don’t have a Plan B right now, you are off on a ledge, and on a dangerous ledge.”
On which, China –where imports continue to fall and the trade surplus climb– just unleashed its largest regulatory revamp in decades, as the press puts it: but they called Common Prosperity “regulatory reform”. There will be a new agency to police all data; a new financial regulator separate from the PBOC for most assets; and a far greater focus on self-reliance in science and technology, with 5% of positions in central government departments to be cut(!) to allow reallocation to focus on strategically important areas. Consider the enormity of that and tell me things are going back to the new normal. Yes, separately China is flagging support for private businesses – if they are “healthy and high quality”; as decided by the CCP, against a background of whole-of-economy resistance to US economic encirclement.
Just because the Fed doesn’t talk about all of this, doesn’t mean it doesn’t matter for the US economy and the FOMC: obviously it does. And it doesn’t argue for lower rates or sustained lower inflation ahead, even if the economy slumps, because our global system is both broken and Bork-en. I wish somebody could fix it.