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Lael Brainard Is Preparing Liberals for Inflation-Fighting
Plus: What CEO wouldn't want Elon Musk on their board?
The Federal Reserve has two statutorily mandated jobs to do when it sets monetary policy: it’s supposed to promote both stable prices and maximum employment. And these goals can be in tension with each other.
In the current environment of high inflation, the Fed has embarked on a series of interest rate hikes, which will tend to push inflation down.1 Higher rates reduce inflation because they reduce demand by making it more costly for businesses to borrow to invest and for consumers to get loans for things like houses and cars. Because they cool demand, higher interest rates will also tend to make businesses less interested in hiring. And that, in turn, may further cool inflation by taking upward pressure off wages.
This dynamic is a reason that liberals tend to be more dovish than conservatives on monetary policy: liberals care relatively more about keeping the labor market tight so workers (especially lower-skilled workers) have more power, and conservatives have tended to care relatively more about keeping inflation low. This isn’t a perfect description of whose views line up where — the Federal Reserve has turned in a dovish direction over the last several years with a majority of Republican appointees on the Federal Reserve Board — but it’s a decent first approximation.
So it’s notable to me that Lael Brainard, a Biden-Obama appointee2 to the board who has made a point of dissenting leftward from her colleagues on some bank regulation issues, was out on Tuesday morning making a progressive case for inflation fighting.
In a speech at a Minneapolis Fed conference, she said the Fed would shed the bonds on its balance sheet more quickly than it had during prior expansions, a comment that caused interest rates to tick upward to their highest level so far this year as investors raised their expectations about how hard the Fed would work this year to push interest rates up and inflation down. And in explaining why the Fed would prioritize inflation control, she noted that people with low incomes are much less able than higher earners to adapt to inflation, other than by consuming less:
A household that had been purchasing brand-name cereal could save money by purchasing store-brand cereal instead, perhaps even eliminating any effect of the price increase on their actual spending while purchasing the same quantity of cereal in that narrow category. However, a household that was already purchasing the store brand would have to either absorb the increase in cost or consume less within that category… Variations in the prices paid for identical goods could reflect differences in the ability of some households to stock up when prices are discounted or to buy in bulk and save — options only available to households with the means to buy in larger quantities, adequate capacity to store larger quantities, or the flexibility to delay purchases if there is an opportunity to save in the future.
This observation is a companion to one you hear more often: That lower-income households have relatively more at stake in the tightness of the labor market than higher-income households do. When the labor market cools, people with low incomes are more likely to lose jobs and income, and they’re less likely to be able to fall back on savings.
The point of observing both of these things is that neither one alone tells you how to handle monetary policy: poorer people tend to be hit harder by almost any negative economic trend, and so when you have to use policy to trade off one bad trend against another, there’s no hold-harmless option.
As a political matter, it’s clear that inflation is swamping job creation as the driver of public perceptions of the economy. And this makes sense for a few reasons. While the tight labor market is driving strong nominal wage increases, they’re not keeping pace with inflation. Real disposable income has been falling for seven months, and while it’s a bit above pre-pandemic levels, its overall rise since January 2020 has been at a significantly more sluggish pace than in 2018 and 2019. This is a bit of context I think liberals tend to forget — the two years immediately preceding the pandemic were a strong period for wage growth, and so people won’t necessarily be impressed even if they understand that real incomes, after all that inflation, are very modestly higher than they were as of January 2020, or that nearly all the jobs lost at the start of the pandemic have now been recovered.
The other issue is more structural. Rising unemployment would cause terrible harm to a subset of workers, but most people would be just fine, whereas high inflation affects everybody. You can argue with people that they should be either more worried about the low-but-costly risk of job loss in a weaker economy, or that they should be more sympathetic to the plight of others, but ultimately people are reacting to what affects them, and inflation far outstrips unemployment for how many people it affects.
Brainard also sketched out how the Fed’s tightening policies could help us along toward a soft landing with much lower inflation but no recession, due to an expansion of the workforce. As she noted, some of the best news in last week’s jobs report was not about jobs or wages but workforce participation:
As of the March labor report, payroll employment has increased at a pace of 600,000 jobs per month over the past six months, and the unemployment rate has fallen by a percentage point over that period and is now close to its pre-pandemic level. In contrast, until recently, the recovery in labor force participation was lagging far behind. So it is particularly noteworthy to see that the pandemic constraints on labor supply are diminishing for the prime-age workforce: The prime-age participation rate jumped 0.7 percentage points for women in March, following a similar-sized jump for men in February. An increase in labor supply associated with diminishing pandemic constraints combined with a moderation in demand associated with tightening financial conditions, slowing foreign growth, and a large decrease in fiscal support could be expected to reduce imbalances later in the year.
Well, let’s hope so. The Biden Administration could help this process along by clearing the visa backlog and bringing in more immigrant and non-immigrant foreign workers to the US. But I am no longer optimistic about the kind of economic improvement that gives Democrats tailwinds heading into the midterms because (1) inflation isn’t moderating yet and (2) when it does, it will tend to be joined by other trends people won’t like, including a continued upward march of mortgage rates. People may like the inflation-reducing effects of a “moderation in demand,” but the way people personally experience moderation in demand is as a decline in the attractiveness of consumption, which is something people rarely get enthused about.
Elon Musk joins Twitter’s board. I have just one small point I want to add to the discussion of this very amusing story. A lot of people on Twitter are talking about Musk’s sudden, surprise involvement (as the company’s largest shareholder!) as if it must be a pain in the ass for Twitter’s existing management, who wouldn’t want him to come in and try to change what they do.
I very much doubt they view it this way.
When you are the CEO of a public company, your job is to make the stock price go up. This is closely related to it being your job to produce profits, but it’s not exactly the same thing. In theory, a stock price captures things a current earnings report does not; it is supposed to reflect expectations among market participants about the company’s potential to earn profits in the future. If the stock goes up, that is prima facie evidence that the company’s financial prospects have improved, and you, as the CEO, get rewarded.
Of course, as Bloomberg’s Matt Levine notes, interest from Elon Musk can move the price of an asset (whether stock or cryptocurrency) in a way that is apparently unrelated to future earnings. I say “apparently” because I can’t know for sure; maybe Elon has some ideas for Twitter that will make it better-managed and more profitable in the long run. (Certainly, the company has not always had the most engaged management in the past.) But I mostly see what Matt sees: Elon turns stocks into memes, or he makes those memes popular among his fans, who are legion, and then green line goes up.
If you are the CEO, it does not necessarily matter that your stock price went up for a kind of stupid reason. You like when the stock price goes up. You want it to stay up. So if Elon takes interest in your company and buys almost 10% of it, why wouldn’t you invite him onto the board? A board seat creates a level of personal commitment that would make it seem weird if he just dumped the stake and took his fans along with him a few months from now. The number one task now is to make sure Elon doesn’t get bored of his involvement in the company, and a board seat surely helps with that.
That’s all for today! I’ll be back tomorrow for the Mayonnaise Clinic. (And if you have questions, about inflation or anything else, please send them my way.)
And it’s reducing its holdings of assets like government bonds and mortgage bonds, which is also a policy that is intended to push up interest rates.
Brainard was appointed to the Federal Reserve Board in 2014 by President Obama. President Biden has nominated her to be vice chair, though she has not yet been confirmed.