Making money: what the experts think
● The continuity candidate
By choosing to reappoint Jerome “Jay” Powell for a second term as chairman of the Federal Reserve, President Biden has opted for “the safest bet” at a hazardous time, said Gina Chon on Reuters Breakingviews. “The Fed’s biggest conundrum is what to do about inflation”, which has just put in its “biggest jump since 1990” – rising 6.2% in October year-on-year. Powell has said he will be “patient about rate hikes” and the nomination of “dovish” Lael Brainard as his vice-chair suggests the Fed will stick to its path of giving the labour market “more time to heal” before biting the bullet.
● Safety first?
Most in the market were relieved at the outcome, said the FT. “Powell’s reappointment reduces uncertainty, and hence, should be a positive for risk assets,” noted JPMorgan strategists in a note to clients. “Historically, markets try to test new Fed chairs, so we believe this outcome will be avoided.” The probability now is for “a cautious approach to lift-off next year”. Yet the question is whether this is really the safest approach, said Alex Brummer in the Daily Mail. By holding back on raising, and continuing with quantitative easing (which is only now beginning to be tapered), the Fed may have “unleashed a financial monster”. Over the last two years, the money supply has soared and much of that cash has flowed into speculative activity. “When the day of reckoning does come, and interest rates start rising, the shock for equity markets could be profound.”
● Emerging angst
One of Powell’s key duties is to avoid a global ruction, along the lines of the “taper tantrum” that inflicted serious damage on emerging market bonds and currencies in 2013. The situation in some countries is already parlous, said Theo Leggett on BBC Business. In Turkey, the lira has “nose-dived” to hit its weakest point against the dollar on record. President Erdogan’s “unconventional view” is that the way to combat rising inflation (now running at 20%) “is to make money cheaper”. Having sacked his central bankers, he has instigated a series of rate cuts that have triggered an “ever-deeper” decline in the lira. It is, to say the least, “a rather hazardous experiment”.