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Meet the person responsible for keeping inflation from spiraling out of control – without tanking the economy

Biden is expected to soon decide whether to keep Jerome Powell as Federal Reserve chair or name a replacement. The nominee will have more influence on the trajectory of inflation than anyone else.

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Jerome Powell, seated at left, is the current Fed chair, but some progressives want him replaced with Lael Brainard, right. AP Photo/Manuel Balce Ceneta

The person who helms the Federal Reserve is one of the most powerful figures in the world. Their job is also one of the most impactful on the lives of ordinary Americans, not to mention others across the world.

That will be especially true in the coming months as the Fed seeks to tame soaring prices without jeopardizing the economic recovery. The consequences of getting it wrong could be catastrophic and result in higher inflation, a return to recession or, worse, the Fed might have to deal with stagflation – in which you get both rising prices and a sluggish economy.

Jerome Powell is the current chair of the Fed, but his first term expires in February, and progressive Democrats are pushing President Joe Biden to replace him with Lael Brainard, a Harvard economist who is currently serving as the only registered Democrat on the board of governors of the Federal Reserve System. Progressives prefer her in part because she appears to be more sympathetic to more financial regulation and Fed action on climate change.

Wall Street investors, economists like me and other central bankers around the world have been impatiently waiting for Biden’s now-imminent decision for weeks. Markets are predicting Powell is most likely going to keep his job. But would it matter if he picked someone else?

I believe the best way to answer that question is to consider the responsibilities of the Fed and its chair, as well as the serious challenges they will face come 2022 and beyond.

Meet the chair

Most introductory macroeconomics textbooks – like the ones I use to teach my students – note that the chair of the Fed is so influential that he or she can make financial markets crash or soar just by uttering a few words in public. Investors admit they scrutinize and dissect every single word the Fed chair says and even count the number of times a certain key phrase is used – I call it “Fed speech bingo.”

While all of this might be a bit of a hyperbole to make students pay more attention to an admittedly boring chapter on money and banking, it’s undeniable that the Fed chair is very important.

The position is ultimately responsible for regulating the banking system, promoting stability of the financial system and conducting monetary policy by controlling the money supply and setting interest rates – the main duties of the Federal Reserve. Seven governors, including the chair, oversee the Fed, and each has a single vote over key policy decisions like interest rates. But the chair wields significant power by setting the agenda and acting as the public voice of the Fed.

The Fed’s most important job is conducting monetary policy, which involves the control of the money supply in order to promote sustainable economic growth. The main tool used to achieve this is “targeting” the short-term interest rate to achieve low inflation and stable employment. This is what is referred to as the Fed’s dual mandate. In recent years, the Fed has also turned to more unconventional methods, like purchasing commercial bonds and other assets.

What this means for the rest of us is that the Fed helps set the rates we pay on mortgages, car loans, credit cards and other types of borrowing. Lower rates mean credit is cheaper, which boosts the economy. But this in turn can drive up inflation.

The Fed can lift rates to reduce inflation, but raising the cost of credit can hurt economic growth and lead to higher unemployment.

This is exactly the careful balancing act facing the Fed right now.

A nearly empty case of different chicken cuts is displayed at a Publix Supermarket in Miami.
Prices of chicken and other goods have been surging lately. AP Photo/Marta Lavandier

The dual mandate – hawks and doves

Americans across the country are seeing higher prices at the mall, grocery store and gas pump as inflation, as measured by the Consumer Price Index, shows it soaring at the fastest pace in over three decades. At the same time, the labor market hasn’t fully recovered from the pandemic-induced recession early last year, with 4 million fewer employed people than in February 2020.

The focus for the Fed right now is clearly on the price increases that were initially expected to be short term and should have stabilized by now. Most economists believe the recent price gains reflect temporary supply bottlenecks and the fact that prices fell sharply in spring 2020 at the onset of the pandemic, which make inflation figures now look much larger.

The big decision that the Fed and its chair will have to make in the coming months is when to begin raising interest rates to tame inflation. If they move too much or too soon, they risk causing an economic downturn, which could lead to substantial job losses. If they act too little or too late, they risk letting inflation get out of control – as Americans last experienced in the late 1970s.

In the language used by Fed watchers, this is the difference between being a hawk and a dove. That is, a hawk is more concerned more about fighting inflation, while a dove focuses more on growth and jobs.

While most experts on monetary policy believe things will be pretty similar whether Powell or Brainard is in charge, the latter is slightly more of a dove – meaning she’s seen as more likely to put employment before fighting inflation.

In 2022, the Fed chair will have to quickly decide what its top priority will be – with stagflation being another possible scenario.

Other issues on the chair’s agenda

The Fed is also responsible for fostering stability, integrity and efficiency of the nation’s monetary and financial system, mainly through regulation.

Financial bubbles are inflating in multiple markets from stocks to digital currencies – thanks in part to the Fed’s policy of easy money that has helped drive up prices. Inattention to financial stability was one reason the Fed missed the great financial crisis until it was too late.

The Fed chair will have to decide whether to make this a higher priority, particularly if it lifts interest rates soon. Doing so could cause a market crash.

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Finally, the Fed is facing pressure to tackle problems beyond its mandate, such as climate change and inequality. This is one of the main reasons Brainard’s in the running in the first place.

Progressive Democrats and activists are urging the Fed to use its regulatory powers to restrict the flow of capital away from carbon-intensive industries and redirect the money toward more climate-friendly ones. This idea is controversial because it’s not in its mandate, it risks hurting Fed independence and can ultimately lead to misallocation of resources.

Similarly, Nobel Prize-winning economist Joseph Stiglitz and other liberals want the Fed to do more to fight inequality. Research shows that the Fed’s policies are contributing to wealth inequality.

While the Fed is probably not able to fix the issues of wealth and income inequality – these are complicated, complex issues requiring congressional action, new legislation or law enforcement – it could at least start to pay more attention to its actions so that it is not actively contributing to the problem.

Continuity or change

But the selection of the Fed chair isn’t the only way Biden will be able to leave his mark on the central bank.

Over the next weeks, he has to fill three other open spots on the Federal Reserve’s board of governors, which provides him with an opportunity for a complete makeover and allows him to shift the Fed’s board toward a more Democratic-dominated one.

This could mean the Fed does end up helping pursue progressive goals like fighting climate change and inequality, perhaps regardless of who the chair is.

Either way, Americans would be wise to pay close attention to whom Biden chooses.

Veronika Dolar does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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Economics

FT-IGM US Macroeconomists Survey for December

The FT-IGM US Macroeconomists survey is out (it was conducted over the weekend). The results are summarized here, and an FT article here (gated). Here’s some of the results. For GDP, assuming Q4 is as predicted in the November Survey of Professional…

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The FT-IGM US Macroeconomists survey is out (it was conducted over the weekend). The results are summarized here, and an FT article here (gated). Here’s some of the results.

For GDP, assuming Q4 is as predicted in the November Survey of Professional Forecasters, we have the following picture.

Figure 1: GDP (black), potential GDP (gray), November Survey of Professional Forecasters (red), November SPF subtracting 1.5ppts in Q1, 05ppts in Q2 (blue), FT-IGM December survey (sky blue squares), all on log scale. FT-IGM GDP level assumes 2021Q4 growth rate equals SPF November forecast. NBER defined recession dates peak-to-trough shaded gray. Source: BEA 2021Q3 2nd release, Philadelphia Fed November SPF, FT-IGM December survey, and author’s calculations.

In the figure above, I’ve used the SPF forecast of 4.6% SAAR in 2021Q4; the Atlanta Fed’s nowcast as of yesterday (12/7) was 8.6% SAAR. A new nowcast comes out tomorrow.

Interestingly, q4/q4 median forecasted growth equals that implied by the Survey of Professional Forecasters November survey (which was taken nearly a month before news of the omicron variant came out).

The q4/q4 forecast distribution for 2022 is skewed, with the 90th percentile at 5% growth, the 10th percentile at 2.5%, and median at 3.5%. I show the corresponding implied levels of GDP (once again assuming 2021Q4 growth equals the SPF ).

Figure 2: GDP (black), November Survey of Professional Forecasters (red), FT-IGM December survey (sky blue squares), 90th percentile and 10th percentile implied levels (light blue +), my median forecast (green triangle), all on log scale. FT-IGM GDP level assumes 2021Q4 growth rate equals SPF November forecast. NBER defined recession dates peak-to-trough shaded gray. Source: BEA 2021Q3 2nd release, Philadelphia Fed November SPF, FT-IGM December survey, and author’s calculations.

On unemployment, the median forecast is for a deceleration in recovery,

Figure 3: Unemployment rate (black), November Survey of Professional Forecasters (red), FT-IGM December survey (sky blue square), 90th percentile and 10th percentile implied levels (light blue +), my median forecast (green triangle). NBER defined recession dates peak-to-trough shaded gray. Source: BEA 2021Q3 2nd release, Philadelphia Fed November SPF, FT-IGM December survey, and author’s calculations.

The survey respondents also think that the participation rate will take a long time to return to pre-pandemic levels.

Source: FT-IGM, December 2021 survey.

On inflation, the median is higher than the November SPF mean estimate for 2022 of 2.3% (and Goldman Sachs’ current estimate).

Source: FT-IGM, December 2021 survey.

The entire survey results are here.

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Over 170 companies delisted from major U.S. stock exchanges in 12 months

  Over the years, United States-based exchanges have remained an attractive destination for most companies aiming to go public. With businesses jostling to join the trading platforms, the exchanges have also delisted a significant number of companies….

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Over the years, United States-based exchanges have remained an attractive destination for most companies aiming to go public. With businesses jostling to join the trading platforms, the exchanges have also delisted a significant number of companies.

According to data acquired by Finbold, a total of 179 companies have been delisted from the major United States exchanges between 2020 and 2021. In 2021, the number of companies on Nasdaq and the New York Stock Exchange (NYSE) stands at 6,000, dropping 2.89% from last year’s figure of 6,179. In 2019, the listed companies stood at 5,454.

NYSE recorded the highest delisting with companies on the platform, dropping 15.28% year-over-year from 2,873 to 2,434. Elsewhere, Nasdaq listed companies grew 7.86% from 3,306 to 3,566. Data on the number of listed companies on NASDAQ and NYSE is provided by The World Federation of Exchanges.

The delisting of the companies is potentially guided by basic factors such as violating listing regulations and failing to meet minimum financial standards like the inability to maintain a minimum share price, financial ratios, and sales levels. Additionally, some companies might opt for voluntary delisting motivated by the desire to trade on other exchanges.

Furthermore, the delisting on U.S. major exchanges might be due to the emergence of new alternative markets, especially in Asia. China and Hong Kong markets have become more appealing, with regulators making local listings more attractive. Over the years, exchanges in the region have strived to emerge as key players amid dominance by U.S. equity markets. As per a previous report, the U.S. controls 56% of the global stock market value.

A significant portion of the delisted companies also stems from the regulatory perspective pitting U.S. agencies and their Chinese counterparts. For instance, China Mobile Ltd, China Unicom, and China Telecom Corp announced their delisting from NYSE, citing investment restrictions dating from 2020.

Worth noting is that the delisting of firms was initiated due to strict measures put in place by the Trump administration. The current administration has left the regulations in place while proposing additional regulations. For instance, a recent regulation update by the Securities Exchange Commission requiring US-listed Chinese companies to disclose their ownership structure has led to the exit of cab-hailing company Didi from the NYSE.

Impact of pandemic on the listing of companies

The delisting also comes in the wake of the Covid-19 pandemic that resulted in economic turmoil. With the shutdown of the economy, most companies entered into bankruptcies as the stock market crashed to historical lows.

Lower stock prices translate to less wealth for businesses, pension funds, and individual investors, and listed companies could not get the much-needed funding for their normal operations.

At the same time, the focus on more companies going public over the last year can be highlighted by firms on the Nasdaq exchange. Worth noting is that in 2020, there was tremendous growth in special purpose acquisition companies (SPACs), mainly driven by the impact of the coronavirus pandemic. With the uncertainty of raising money through the traditional means, SPACs found a perfect role to inject more funds into capital-starving companies to go public.

From the data, foreign companies listing in the United States have grown steadily, with the business aiming to leverage the benefits of operating in the country. Notably, listing on U.S. exchanges guarantees companies liquidity and high potential to raise capital. Furthermore, listing on either NYSE or Nasdaq comes with the needed credibility to attract more investors. The companies are generally viewed as a home for established, respected, and successful global companies.

In general, over the past year, factors like the pandemic have altered the face of stock exchanges to some point threatening the continued dominance of major U.S. exchanges. Tensions between the US and China are contributing to the crisis which will eventually impact the number of listed companies.

 

Courtesy of Finbold.

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Economics

Stock futures open flat as Omicron concerns ease

Dow futures edged up 0.02%, while contracts on the Nasdaq Composite inched up 0.10%…
The post Stock futures open flat as Omicron concerns ease first appeared on Trading and Investment News.

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Dow futures edged up 0.02%, while contracts on the Nasdaq Composite inched up 0.10%

Stock futures opened relatively flat on Wednesday evening, though sustaining gains posted by a three-day recovery rally that was led by cooled investor concerns around the Omicron variant of the coronavirus.

Dow futures edged up 0.02%, while contracts on the tech-focused Nasdaq Composite inched up 0.10%. All major indexes closed up, with the S&P 500 adding 14.46 points to end the session at 4,701.21, just 0.5% short of the trading session on Nov. 24, a day before the latest COVID-19 variant was announced by the World Health Organization (WHO).

The moves were supported by eased virus fears after Pfizer Inc. and BioNTech reported that early lab studies show a third dose of their coronavirus vaccine mitigates the Omicron variant.

The vaccine makers had indicated the initial two doses may not be enough to protect against infection from Omicron. Shares of Pfizer (PFE) traded 0.62% lower on Wednesday, closing at $51.40.

With virus concerns diminishing, investors are pivoting their attention back to economic data, awaiting Consumer Price Index (CPI) figures on Friday to assess the extent inflationary pressures will persist.

If the Omicron variant was to lead to a resurgence in goods spending at the expense of services or to further complicate supply disruptions, there could be a clear inflationary impact, too, HSBC economist James Pomeroy wrote earlier this week in a research note to clients.

He stated: The inflation news in the past few weeks has been decidedly mixed — with upside surprises in both the U.S. and eurozone being offset by the possibility of some of the supply chain issues starting to alleviate, while energy prices have fallen sharply in recent days.

The post Stock futures open flat as Omicron concerns ease first appeared on Trading and Investment News.

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