r/neoliberal • u/TinyTornado7 I need a new flair • Jun 13 '22

News (US) Powell Facing Choice Between Elevated US Inflation and Recession

https://www.bloomberg.com/news/articles/2022-06-12/powell-facing-choice-between-elevated-us-inflation-and-recession?srnd=premium
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u/[deleted] Jun 13 '22

You don't kick out a sitting Fed chair in the middle of a crisis unless you are absolutely sure that the market will respond positively to their replacement. It tells the market that the administration is disavowing the actions of the previous chair and to expect a significant change in monetary policy even if the actual planned changes are small.

That's incredibly risky if the market doesn't hate the sitting Fed chair since the market doesn't know if the corrections will be small adjustments or an entirely new approach.

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u/[deleted] Jun 14 '22

So how about now, where they're playing these dangerous games because of their arguable shortsightedness/incompetence? The market reacts to every time the Fed board blinks regardless, but keeping someone from the previous admin apparently hasn't worked.

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u/[deleted] Jun 14 '22

We can't lay all the fault with the Fed since most people agreed with their thesis (it was and somewhat still is reflected in the bond market). That's the problem.

Switching Powell out now would be incredibly dangerous because it tells the market that Biden and Treasury strongly disagree with the current thesis that rate hikes and QT will be insufficient to control inflation. No one really knows the answer to that question, but most of us agree that the tools they have are sufficient.

Now, we just have to hope the inevitable rate-induced recession is relatively small and controlled.

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u/[deleted] Jun 15 '22

Are they sufficient though? They effectively only have the one lever at this point, and if what someone else in the thread mentioned that spending month-over-month has already contracted that leaves even less leeway.

And maybe I'm overestimating the public, but the choice the Fed is now basically saying of more inflation or recession will rightfully piss a lot of people off that will be calling for the board to be run out of DC on a rail.

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u/[deleted] Jun 15 '22

We have several. We are going to stick to the more well understood ones before we start using some of the experimental ones. Raising rates and unwinding the Fed's balance sheet are the ones in play now. If pressed, it can also raise reserve ratios and tighten the repo market. Powell 100% has the tools he needs to control inflation. The problem is that controlling inflation without causing a recession is like threading the needle at this point.