Jay Powell, Inflation Justice Warrior

Powell’s challenge tomorrow is to earn confirmation by the Senate by dutifully acting concerned about inflation. He must take the blame for it (which deflects from the Biden administration’s spending agenda), and appear to “do something, even though he still believes correctly that it is transitory – all the while not crashing markets or the economy. His free option is to accelerate the pace of tapering asset purchases, now an irrelevant de-risking exercise. Market-implied expectations for lift-off have moved forward to the June FOMC. We expect inflation will cool by then and create an option for deferral. But based on the pace of labor market recovery across most groups, and reaccelerating growth after a disappointing Q3-2021, June lift-off would not necessarily be inappropriate. The curve expects only about five hikes this cycle, perhaps implying the return of “secular stagnation” – or, instead, a global savings glut that has moved the natural rate of interest lower.