11/17/2021 | News release | Distributed by Public on 11/17/2021 15:24
The Fed is currently behind on tightening. This, however, is not an isolated case; the central bank has previously lagged in tightening or easing policies. That said, we believe Powell will eventually do the right thing. Our base case scenario is for the Fed to act on rates after a lag of a few month, but political opposition could interfere with the process. Powell's four-year term as chair expires in February 2022, and there is no clear indication whether President Biden will reappoint him. There are also other vacancies at the Fed.
There is political preference to appoint mostly "doves." Powell is currently one of the most dovish members at the Fed. There is the possibility that Biden will appoint Fed Governor Lael Brainard, who is even more dovish, as chair. In addition, the Fed continues to grapple with the fallout from trades made by two regional reserve bank officials - former Dallas Fed President Robert S. Kaplan and former Boston Fed President Eric S. Rosengren. Both men - who made up the hawkish wing at the Fed - have resigned. With their departures, we have less confidence in the Federal Open Market Committee's ability to assess changing inflation dynamics. That said, external pressures and the well-trained staff at the bank should be able to guide the FOMC on the right path, albeit with a delay.
Since the start of the pandemic, we have seen high levels of monetary and fiscal stimulus. In some sectors, activity has recovered to above pre-pandemic levels. But U.S. policymakers have maintained their expansive policy. At this point in the economic cycle, we believe additional stimulus will buoy demand and create inflationary pressures unless it comes with front-loaded tax hikes.
Higher levels of U.S. monetary and fiscal stimulus during the pandemic
Sources: Bloomberg, Federal Reserve, Putnam Investments calculations, as of October 2021.
Past performance is not a guarantee of future results.
During the post-financial-crisis period, limited fiscal support and abundant monetary stimulus - as households were deleveraging - widened the income gap. Low growth and worsening income inequalities helped pave the road to political populism. Government fiscal balances were deteriorating well before the Covid-19 pandemic. This is a global trend. If populism is promoting the role of fiscal policy in an economy, then we believe it is time for monetary policy to take a back seat. Central banks are not the only game in town anymore.
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