Christmas has come early for the politicians lusting after four years in the White House. “Santa” Jay Powell, chairman of the Federal Reserve Board, and his monetary policy elves promised near-zero interest rates until “maximum employment” is achieved and inflation is on track to “moderately exceed 2% for some time”. That would benefit the next president — either Donald Trump, permanently ensconced in the “naughty” column, or Joe Biden, for decades listed in the “nice” column.
In short, the Fed has guaranteed the next president that it will see the economy through rehab as it emerges from the ICU. That almost certainly assures Powell reappointment when his term as chairman expires in February 2022. Unless … Unless his confidence in the Fed’s ability to bank any inflationary flames that zero interest rates might ignite is misplaced. After all, Trump plans to loosen fiscal policy by cutting taxes, and Biden plans to increase deficit spending — both usually considered as pouring petrol on inflationary flames. Owners of a mortgaged house, lots of shares and other assets might worry, but surely less than owners of small savings accounts accrued by years of self-denial.
For both candidates, 2024 is less relevant than the next 43 days. Here, all the signs (save one) point to a recovery sufficiently robust to favour Trump. Industrial production has risen in each of the past four months, as have retail sales, with the most recent three months above pre-pandemic levels. The Fed is forecasting a smaller drop in GDP compared to last year than earlier (-3.7% as opposed to -6.5% ), and a lower unemployment rate (7.6% as opposed to 9.3%) by the end of this year.
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