Powell’s Fed will continue to run its ultra-loose monetary policy for as long as possible in an effort to inflate the debt away. On Wednesday Powell will say more time is needed for the economy to recover before the Fed considers tightening interest rates. Powell will talk of transitory inflation. Powell will quote May’s poor Labor Participation Rate as evidence that more time is needed to repair the economy. Powell will speak of inequalities in the rate of economic recovery across socio-economic population segments. Powell will also likely comment on climate risk (since when are Fed officials paid to play social politics?)
Our best guess is that Powell and the Fed won’t provide the public with any real insight until the September 21st/22nd FOMC meeting. By that time the natural economic lift from the summer will have subsided. More importantly, by then Powell ought to know whether the Biden Administration plans to extend the Pandemic Emergency Unemployment Compensation (“PEUC”), program which is set to expire September 6th (our bet is “YES”). Powell has the power to say “no” to subsidizing that program – the Fed is after all an “independent” agency (or it used to be). Our bet is that Powell will cave rather than push back on Biden as Powell values his Fed Chair post (Biden will vote thumbs up or down on renewing Powell’s term in February 2022), more than ensuring that the U.S. economy is well-positioned for sustainable long-term economic growth. The latter would require us to tighten our belt and take our medicine.