Second life for Fed chief
The reappointment of Jay Powell as chairman of the Federal Reserve was the safe choice. It will not have been easy for President Biden to nominate a Republican first chosen by his despised predecessor Donald Trump.
The US president was advised that, at a critical juncture for the post-Covid economy, it was not the right moment to make a change.
The US central bank has a mandate from Congress to operate a monetary policy which balances the need of the labour market against inflation. That is why Powell has looked through an inflation rate of 6.2pc, stayed true to ultra-low interest rates and continued with the US’s bond buying programme.
The Fed modestly began running down its $120bn (£89bn) a month of quantitative easing by $15bn (£11bn) earlier in November and has, in the past, said that it will not raise official interest rates from near to 0pc until it has completed the ‘tapering’ of bond purchases. Cynics argue that Powell has held back on raising interest rates until he was reappointed. In an unusual move, his main rival for the job, Democrat Lael Brainard has been chosen as vice-chairman, a post usually held by the head of the New York Fed. her elevation to the number two job is seen as a political move to appease Democrats on Capitol hill who wanted one of their own.
It seems unlikely that Powell will seek to raise rates until he has been re-confirmed by the Senate. however, even though markets welcomed his re-nomination, they hate change, and it is unlikely that he will hold back once he is confirmed.
As the US economy has bounced from the pandemic, its lower income black citizens have found it more difficult to be reemployed and as a consequence, rates needed to be held low until job parity is restored. By the same token inflation hurts low income families more than the better off who are less dependent on cheap food and gasoline (petrol). The problem is that by holding back on raising rates for so long and continuing with quantitative easing, the Fed has unleashed a financial monster.
The money supply has soared over the last two years and much of that cash has flowed into speculative activity in the shape of special purpose acquisition companies (SPACs), crypto currencies, private equity and retail investing on the advice of social media sites such as Reddit. When the day of reckoning does come and interest rates start rising, the shock for equity markets could be profound.
Until Powell has navigated his way through his re-nomination hearings he will not do anything drastic.
That may give the Bank of england some breathing space before it starts to raise rates to combat our own 4.2pc rate of inflation. Being the first of the major central banks to break with the post-pandemic orthodoxy – that higher rates won’t make any difference to a supply-side shock – will be tricky.
Governor Andrew Bailey showed unexpected decisiveness at the start of Covid. he may be tempted to show decisiveness again and repair a market reputation for vacillation.
Mines shafted
The near one-third drop in the shares of Peruvian natural resources concern hochschild Mining may have more to do with volatile South American politics than anything else. But it demonstrates the vulnerability of the sector to decisions based on climate change.
The share price collapse followed the weekend declaration by Peru’s prime minister Mirtha Vasquez that four mines in the southern Ayacucho region – two controlled by hochschild – would be closed on environmental grounds.
The paradox is that Peru is a big producer of copper, gold, silver, zinc and tin. Copper in particular is important as the world makes electrification a priority.
Other London-quoted miners with interests in Peru – including Anglo American and Glencore – will be watching carefully. Lima’s leadership will need to be careful if they don’t want to turn a mining economy into a basket case in the same way as happened in Venezuela when it took on free market capitalism.
Warning signal
BT’S new chairman Adam Crozier might want to keep a weather eye on events at Telecom Italia.
having initially become a partner in Italy’s sluggish broadband roll-out, private equity giant KKR has now launched a near £9bn offer for the whole network.
Be careful what you wish for.