Can the Federal Reserve navigate a narrow path and slay price inflation while steering the economy to a soft landing?
During an interview on CNBC Squawk Box, financial analyst Jim Grant expressed his doubts.
He compared Jerome Powell’s task to Captain Chelsey Sullenberger’s when he was forced to land a US Airways plane on the Hudson River after an inflight emergency, nothing Powell is “no Sully.”
Grant went on to explain that even if things don’t look so bad right now, rivets are popping in the economy.
The June non-farm payroll report came in with weaker-than-expected job growth and stronger-than-expected wage growth. Grant said this might be the first whiff of stagflation, and he called the jobs report a “little spritz” of the late 1970s. He said it underscores the difficulty the Federal Reserve faces in its attempt to rein in price inflation without spinning the economy into a deep recession.
It reminds me a little bit of Captain Sully on the Hudson. It requires a great deal of precision and not a little luck to do what they say they will do, which is to deliver us from the consequences of 10 years of artificially low rates.”
One of the hosts pointed out that the Fed is also trying to shrink its balance sheet, which didn’t go so well when it tried to do it back in 2018. As you might recall, quantitative tightening was on “autopilot” until the bottom fell out of the stock market in the fall of 2018. By the end of 2019, the central bank had returned to quantitative easing.
Grant said the Fed’s balance sheet looks a lot like Silicon Vally Bank’s did before it collapsed.
It very much resembles the banks that didn’t make it through March because they have an immense market-to-market loss, in excess of $900 billion as of March 31. And they are losing substantial amounts on operating. … Their losses are far greater than their capital. So, the Fed itself is a symbol of the difficulties of the world in which rates are now being normalized.”
The Fed claims this doesn’t matter – it’s just accounting. Grant agrees that it isn’t exactly a practical problem, but it is “a highly important symbolic one.”
The world, in its adaptive way, is coming to grips with the fact interest rates have been not only low but duplicative. They’ve led people to do things they wouldn’t have done if they only could have known where real rates would wind up — meaning legitimate market-determined rates.”
Even with the Fed malfeasance, we haven’t seen the problems play out in the markets. Grant noted that the Chicago Fed Financial Conditions Index still indicates that the current financial environment is still “easy” even after all of the talk and rate lifting.
So, there’s a difference, as someone said recently, between tightening and tight. And by the standards of the Volker era, monetary policy is not yet tight. And yet, there are undeniable signs of stringency throughout finance.”
Grant noted the growing number of bankruptcies.
Rivets are popping, kind of off-stage. And the question for the Fed, the question for all of us, is will the consequences of these rates now playing out and these examples of stringency — will the consequences overwhelm the Fed’s attempt?”
Is this a repeat of 2008, when things looked fine for a while, and everybody swore the problems were contained? Or is Jerome Powell really Captain Sullenberger?
He’s a nice guy, Jay Powell, but I think he is not Sully.”
And Grant said he thinks the 2008 analogy holds in terms of financial problems abating and then coming back.
How often have we seen things that didn’t appear to matter suddenly mattering?”
So, have the hiccups the economy has experienced in the last 18 months been enough to correct the excess of the Fed over the last decade-plus? Grant said he would be surprised if the Fed is able to orchestrate this nice soft landing.
I confess that is partly my temperament. I’m just not equipped to conceive the Fed might, in all of its error-laden ways, finally stick it. … I think that the distortions created by these rates, and by the expectation of Fed intervention, have been so widespread and so deep that its highly unlikely that this is the extent of the correction for those things.”
