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(Bloomberg) — For Rick Plympton, it’s unimaginable to go back to the pre-Covid economy. The CEO of precision lens manufacturer Optimax Systems Inc. He sees “quicksand” in many facets of his business.
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Finding enough staff is difficult, the costs of key inputs are more volatile, and there are longer lead times between ordering the devices and delivering them to the company’s department stores in Ontario and New York. Washington also backs the U. S. chip-making industry, which uses Optimax lenses. – as politicians adapt to a changing geopolitical landscape.
Many of those adjustments are temporary, according to Plympton. Hard-work markets “are going to be here for decades,” he said.
But Federal Reserve Chair Jerome Powell is rarely in a position to be so conclusive. “The pandemic is still making history in our economy right now,” he told House lawmakers on March 6. “Let’s just be prepared to be surprised during the next chapter. “
And the long-term economic projections of Powell and his fellow Fed policymakers make it appear that little has been replaced despite the geopolitical, labor, and origin chain shocks of recent years.
Central banks act as a country’s economic storytellers, providing descriptions of economic trends and explaining why their policy is tailored to the contours of a specific moment. The Federal Reserve’s lack of a comprehensive view of why the U. S. expansion has been resilient in the face of peak interest rates breeds volatility. as investors have to guess how they will react. Volatile rates make planning difficult for families and businesses.
“Powell helps keep talking about normalization and rebalancing, but you can’t go back to 2019,” said Jim Bianco, president of Bianco Research. “Every time we have a big economic shock, like in 2008 or 2020, the economy changes. “
Read more: Dollar superpower threatened by internal and external unrest
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Bianco, who has been analyzing the U. S. economy and money markets for more than three decades, comes up with a list of such new features of the economy.
Consumers appear to have a greater propensity to spend, perhaps due to greater confidence in job security, or even a generational shift toward preemptive saving, with the consequences of the 2007-2009 currency crisis now more distant. The non-public savings rate below 4% on average over the next two years, compared with more than 6% in the decade to 2019.
Businesses now appear to be holding precautionary inventories, and wholesale inventories are operating at a higher sales velocity than before the pandemic.
Then the task market.
At Optimax, even wage increases and a profit-sharing plan that distributes 25% of profits to workers have failed to attract enough workers. “After the pandemic, we have more jobs than workers,” Plympton said in a phone interview.
Drew Greenblatt, president of Marlin Steel Wire Products in Baltimore, faces the same challenge. As you walk through his cavernous workshop and show off new precision equipment capable of generating more portions per hour, he can’t wait to find skilled workers to work. ” It’s killing me,” he says. I’ve been given all this technology and it’s there. “
These anecdotes illustrate why the U. S. unemployment rate is near an all-time low of less than 4%, despite what Federal Reserve officials call “restrictive” interest rates. Wage increases continue to achieve 4% annually, by comparison. to an average of 2. 4% over the decade to 2019. Since the call to demand remains strong, corporations must increase their costs while still facing increases consistent with wages.
For many investors, the economy looks more inflationary in the long run, requiring higher interest rates. Futures trading recommends a Federal Reserve benchmark rate of 3. 5% in a few years, one percentage point above the most recent long-term forecast from Fed policymakers, which is expected to be updated at the March 19-20 policy meeting.
Monetary policy works both by communicating the outlook and by raising or lowering interest rates. If investors perceive how the Federal Reserve views the state of the world, it reduces overall volatility and decreases as investors pay for risk.
In the past, the Federal Reserve’s guidance has helped shape expectations. When economic expansion resumed in the 1990s, then-Federal Reserve Chairman Alan Greenspan signaled a structural acceleration in productivity that meant the dangers of inflation had diminished.
Today, Powell can draw on enormous resources to assess the effect of post-pandemic shocks on the U. S. economy. The Federal Reserve Board is made up of two divisions that make internal and external economic forecasts, as well as a political strategy unit in Washington. . There were more than 700 full-time equivalent workers by 2023, with a budget of $202 million.
Still, there are great dangers for a central bank to draw big conclusions after an economic hurricane like the pandemic and the billions of dollars in fiscal and financial expenditures that followed.
Fed officials still bear scars after noting in 2021 that inflation is typically a phenomenon of transitory chain-of-origin lockouts, only to see it widen and exceed nearly everyone’s expectations.
Declaring that the economy can sustain a faster rate of expansion through a new investment boom may simply threaten to be interpreted as an endorsement of President Joe Biden’s policies ahead of the November election. As an alternative, argue that the U. S. is now on the brink of emerging inflation. And long-term interest rates may simply sway Republican arguments. Powell saw the political sensitivity this month when he argued at a congressional hearing that immigration had eased some of the strain on the hard labor market. Lawmakers peppered him with comments on this point.
Lou Crandall, lead economist at Wrightson ICAP LLC, says that staying away from a conclusive view of structural economic replacement “seems to me to be the right to conduct policy. “
“At a time when trends are moving faster than expected, it would be difficult to know for sure what this means for policy,” says Crandall.
However, all central bankers have been hesitant to communicate about the new characteristics of the economy.
Powell’s counterpart at the European Central Bank, Christine Lagarde, said the global economy could “enter an era of adjustments in economic relations and disruptions in established regularities. “Speaking at the annual convention held in Jackson Hole, Wyoming, last August, Lagarde highlighted three such disruptions: changes in the market for hard work and in the way other people work, a transformation of energy markets, and the fragmentation of the world into competing blocs. While it’s unclear whether those changes are permanent, they’ve been “more persistent than first expected,” he said.
Fed policymakers will have the opportunity to offer a fresh assessment of the underlying tightening of the economy when the central bank initiates a new policy review later this year. The last one, in 2020, focused on how to deal with persistent interest rate insufficiency. 2% inflation target. This proved ill-timed, as it ended just before the health load increased.
Regardless of the direction of Federal Reserve officials this time around, today’s demanding situations are greater than those of years before Covid hit.
The bottom line for Julia Coronado, wife of MacroPolicy Perspectives LLC: “We’re in the midst of something that’s still incredibly complicated and volatile” to predict.
–With those of Edward Bolingbroke and Alex Tribou.
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