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The NS Capital Investment Committee has been fortunate to build an advisory relationship with a former Federal Reserve Bank President. It has been invaluable to get the perspective from someone that has “been in the room.” The statement “Don’t Fight the Fed” may never be more relevant than it has been over the past twelve months. As we conclude our look back/look forward series, we felt this gentlemen’s insights would be of interest. Below are key highlights from Todd Peters, Chair of our Investment Committee, conversation conducted on March 29, 2021.
What is the first thought that comes to mind as you recall the past year?
The speed and firmness of the response. Powell and the Federal Reserve leadership team have benefited the country greatly. The dramatic moves achieved their intended result of an almost immediate and sustained rebound.
How would you describe the USA economy?
The economy is back on track but not completely recovered. There is still a 9 million jobs deficit versus pre-pandemic levels. While consumer spending has held up, there are a lot of people hurting. But there are good effects from the vaccinations. The country is reopening. As a result, there is a chance that 2Q 2021 GDP may get back to pre-pandemic levels.
What does this mean for inflation?
There is likely to be a spike in the summer. The question is…will that spike be sustained? The Federal Reserve is aiming for some inflation so this will be an area of interest for all market watchers.
How do you anticipate the Federal Reserve will address inflation?
Nothing very specific has been mentioned. This is an ever-evolving economic situation. Another former Federal Reserve official stated that an inflation rate of 2.25% (above the 2% target) for a few months would be acceptable. 2.50% is kind a of line. And 3.00% is a definite warning. Should we experience a very robust 2Q and 3Q 2021, leadership may get concerned quickly. But a less robust/weaker GDP number might allow the inflation rate to stay above 2% for a longer period.
How does the unemployment rate factor into this analysis?
The Federal Reserve has two primary mandates: 1) price stability and 2) high employment. Both Chairman Powell and Treasury Secretary Yellen put a higher weight on jobs. If the unemployment rate stays high, the Federal Reserve likely will not react to inflation as quickly.
What do you make of the Powell/Yellen working relationship?
Both are bright and decent people. And before Powell became Chairman, he was a member Yellen’s leadership team. They worked well together. As a result, I believe there will be a unified macroeconomic front, which is a positive. Federal Reserve independence is critical. With her understanding of this, it is likely that Yellen will be very reluctant to come at Powell. Of interest, Powell’s Chairmanship ends next year. Democratic leadership will need to decide but there is a reasonable chance he will be reappointed.
Are future decisions going to be more difficult than those made last March?
Not more difficult but more nuanced. There are no obvious decisions now.
What are the focus areas going forward?
There are two: 1) when will the Federal Reserve begin to raise interest rates again? And 2) when will they end the bond buying program? Market watchers are closely inspecting all Federal Reserve statements in search of the first indication. The bond buying program will likely end before they start raising interest rates. At present, however, Powell does not expect either to happen soon.
Any Concluding Thoughts?
We can take some pleasure in escaping a depression. The Federal Reserve’s actions…compared to the non-reaction in the 1930s…has enabled us to come out of this crisis. Obviously, this is a good thing. We have reason to have confidence, but we cannot let our guard down.