US Federal Reserve chairman Jerome Powell “should be sacked”, according to Tyndall’s Felix Wintle, because he has changed the mandate of the US central bank to ignore rising inflation
The actions of the United States’ central bank have implications for all investors on a global scale and its decisions on inflation and interest rates directly impact the US dollar, which itself has a meaningful effect on global risk asset prices and investors’ risk tolerances.
Wintle, manager of the VT Tyndall North American fund, argued that Powell has failed to deliver on the Federal Reserve’s two mandates of price stability and full employment.
Crucially, he argued that Powell had changed the Federal Reserve’s mandate by aiming for inflation and criticised him for not keeping rising prices under control.
“The very idea of the Fed creating inflation is anathema to the principles of the mandate; ‘price stability’ means keeping the cost of living at a sustainable level and this is no longer happening,” he said.
Some investors would say that the extraordinary circumstances of the coronavirus pandemic did require extraordinary actions from the world’s most important central bank, but Wintle said this argument no longer stood up to scrutiny.
“There is a mandate to keep inflation and prices stable, and he [Powell] has basically taken it upon himself to reverse that and bring about inflation,” he said.
Although Powell may be targeting economic growth as well as inflation, Wintle said Powell has gotten economic growth “mixed up” with rising prices.
“The fact that the Federal Reserve is still buying bonds when the economy is running so hot does not make any sense,” he said. “Why is the Fed so slow to reduce asset purchases, let alone raise rates, when both GDP and inflation are growing at north of 5% year on year in the fourth quarter of 2021?”
Wintle also argued that Powell has been “disingenuous” with his comments about inflation being transitory and by focusing on elements such as used car prices.
“A much better gauge of inflation, the type that matters to people, is the cost of shelter, food and of energy and all these are still rising,” he said. “And consumers expect these to continue rising.
“The problem with the free money is that it creates inflation, which is good for those who own assets, like stocks, but bad for all those who don’t – for them the cost of living keeps rising, fanning the flames for more social inequality.”
He highlighted the moves in Owner’s Equivalent Rent, which tracks home prices, and warned that it is rising to levels not seen for decades.
Year-over-year chart of house price index and Owners Equivalent Rent
Source: Tyndall Investment Management
Wintle noted that a third of the consumer prices index (CPI) calculation is made up of shelter, and that this cost of living is reflected in owners equivalent rent – which takes into account the amount of rent that would need to be paid to substitute an owned house as a rental property.
He speculated that one reason the Fed may be ignoring its two mandates is because the central bank is becoming “increasinghly politicised” and “he [Powell] is arguably doing the bidding of politicians or possibly even the markets as they see it”.
One can look to the history of American recessions to potentially understand the actions of its central bank, Wintle said.
“There is this quite strong knee jerk reaction just to never have another Great Depression,” he explained.
“Although [quantitative easing] QE is a relatively new thing of the past 15 years or so, in America there's this idea that ‘we've got to do whatever it takes so we don't have another Great Depression’ and I think the pandemic possibly stoked those fears.”
However, despite not having the same historical fears, the UK’s central bank isn’t doing much better of a job in Wintle’s view.
He criticised the Bank of England governor Andrew Bailey for indicating that he was going to raise interest rates in the UK before holding interest rates low earlier in the month.
At the time it was a surprise decision for financial markets and caused immense volatility in the pound.
Wintle said: “It wouldn't have been a huge raise, it would have taken back the emergency cut they did post-Covid. It was probably quite a good idea.
“But then he said, ‘we’re going to do it’ and tried to signal to markets that it would, but then he didn’t do it. It was a complete disaster.
“I think a steady-as-you-go monetary policy in the UK and US will probably be appropriate, but it’s hard to see the Fed doing that in the US at the moment.”