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Central bankers and most economists failed to anticipate the sharp increase in inflation that began in 2021, and public policymakers were slow to respond after insisting that price pressures were “temporary,” a new paper co-authored by former Federal Reserve Chair Ben Bernanke states.
The Fed misjudged the economic effects of pandemic-era fiscal programs, which explains why many failed to accurately forecast the inflation that resulted from the stimulus and relief measures, including the March 2020 $2.2 trillion CARES Act, the December 2020 package that consisted of $900 billion in COVID-related spending, and the March 2021 $1.9 trillion American Rescue Plan.
The CARES Act, signed by former President Donald Trump, was sufficient enough to strengthen businesses’ and households’ balance sheets and support their ability to spend in the future, the paper claims.
“Overall, as a share of GDP, the headline costs of these three COVID-era fiscal packages were about 4-1/2 times the size of the American Recovery and Reinvestment Act (ARRA), enacted in response to the 2008 financial crisis and the ensuing recession,” Bernanke and economist Olivier Blanchard wrote in the academic paper, titled “What Caused the U.S. Pandemic-Era Inflation?”
However, looking back at the coronavirus pandemic, Bernanke and Blanchard asserted that the inflation bursts were driven by several shocks, such as the dramatic rise in commodity prices, demand shifts (from services to goods), and labor tightness.
But while the economists concede that wage growth had little effect on inflation in early 2021, the paper purports that labor costs increased over time and have become more entrenched in current inflationary pressures.
“The effects of tight labor markets have begun to cumulate,” the paper noted, adding that they will likely “grow and will not subside on its own.”
“The portion of inflation which traces its origin to overheating of labor markets can only be reversed by policy actions that bring labor demand and supply into better balance,” they wrote.
As a result, the Fed has more work to do to curb inflation.
“Labor market balance should ultimately be the primary concern for central banks attempting to maintain price stability,” the paper said.
Bernanke now serves as a distinguished senior fellow at the Brookings Institution. Blanchard, who previously worked as the director of the International Monetary Fund’s research department, is a senior fellow at the Peterson Institute for International Economics (PIIE).
In January 2021, the consumer price index (CPI) was 1.4 percent. The annual inflation rate started to climb in March of that year, shooting up to 2.6 percent before peaking in June 2022 at 9.1 percent. Since then, the CPI has slowed to 4.9 percent, and the Cleveland Fed Bank’s Inflation Nowcast expects the May CPI to ease to 4.1 percent.
Annualized average hourly earnings for all U.S. employees have been elevated throughout the pandemic as employers enticed candidates with higher pay, hovering around 5 percent. Wage gains have been gradually coming down since peaking at 5.9 percent in March 2022, coming in at 4.4 percent in April.
But real wage growth (inflation-adjusted) has been negative for the past two years.
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Soft Landing and Labor Markets
Since the central bank’s tightening cycle began in March 2022, Fed Chair Jerome Powell argued that a soft landing—a moderate economic slowdown, disinflation, and a labor market intact—is possible.
“I continue to think there’s a path to getting inflation back to 2 percent without a significant economic decline or significant increase in unemployment,” Powell said during a post-Federal Open Market Committee (FOMC) policy meeting press conference in February.
But Bernanke and Blanchard posit that the U.S. economy might need to slow further to clamp down on inflation.
“Looking forward, with labor market slack still below sustainable levels and inflation expectations modestly higher, we conclude that the Fed is unlikely to be able to avoid slowing the economy to return inflation to target,” Bernanke and Blanchard explain in the paper.
The paper states that the Fed’s 2 percent target rate could be achieved if labor market slack falls below 1 over the next two years. This metric monitors the number of job openings for each unemployed jobseeker, so if it dips under 1, it signals that more out-of-work individuals are competing for jobs than there are open positions. It presently sits at 1.6.
“Allowing (the ratio) to remain near current levels does not bring inflation down in our projections. Indeed, because an extended period of inflation raises long-term inflation expectations, it leads to slowly increasing inflation,” Bernanke and Blanchard said.
Bernanke appeared alongside Powell at the Perspectives on Monetary Policy panel discussion at the Thomas Laubach Research Conference on May 19. During the event, Powell suggested that labor market slack didn’t play much of a factor when inflation first spiked in early 2021. However, moving forward, he does believe that “labor market slack is likely to be an increasingly important factor in inflation.”
Meanwhile, despite many expectations suggesting that the unemployment rate needs to climb a few percent higher from its current level of 3.4 percent, Powell conceded during his semi-annual “Monetary Policy Report” to Congress that the labor market doesn’t need to be decimated to restore price stability.
Does this mean interest rates need to be higher? That’s the discussion many Fed officials are having.
St. Louis Fed Bank President James Bullard expects two more rate increases this year. He told an American Gas Association financial forum in Florida that “we’re going to have grind higher with the policy rate in order to put enough downward pressure on inflation and to return inflation to target in a timely manner.”
Bullard isn’t a voting member of the FOMC.
In a May 22 interview with CNBC, Minneapolis Fed Bank President Neel Kashkari, a voting member, said it was “a close call” whether to raise rates or hit the pause button at the June FOMC meeting.
According to the CME FedWatch Tool, investors mostly expect the Fed to slam the brakes on rate hikes.
But if the central bank does opt for a rate pause, it might not mean the tightening cycle is over, Kashkari says.
“Some of my colleagues have talked about skipping. Important to me is not signaling that we’re done,” he told the business news network. “If we did, if we were to skip in June, that does not mean we’re done with our tightening cycle. It means to me we’re getting more information.”
The Fed must be “extremely mindful” of when higher interest rates begin to affect the broader economy significantly, warns San Francisco Fed Bank President Mary Daly. The time “is getting nearer,” she said at an economic symposium at the National Association for Business Economics and Banque de France on May 22.
“And when you add the credit tightening that we’ve been seeing to that, it means that there’s a lot of factors pulling back the reins on the economy, and that’s why we have to be so critically data-dependent because if we think it’s not here yet and then we tighten too much, we can easily create an unforced error where we’ve over tightened.”
Article cross-posted from our premium news partners at The Epoch Times.
Five Things New “Preppers” Forget When Getting Ready for Bad Times Ahead
The preparedness community is growing faster than it has in decades. Even during peak times such as Y2K, the economic downturn of 2008, and Covid, the vast majority of Americans made sure they had plenty of toilet paper but didn’t really stockpile anything else.
Things have changed. There’s a growing anxiety in this presidential election year that has prompted more Americans to get prepared for crazy events in the future. Some of it is being driven by fearmongers, but there are valid concerns with the economy, food supply, pharmaceuticals, the energy grid, and mass rioting that have pushed average Americans into “prepper” mode.
There are degrees of preparedness. One does not have to be a full-blown “doomsday prepper” living off-grid in a secure Montana bunker in order to be ahead of the curve. In many ways, preparedness isn’t about being able to perfectly handle every conceivable situation. It’s about being less dependent on government for as long as possible. Those who have proper “preps” will not be waiting for FEMA to distribute emergency supplies to the desperate masses.
Below are five things people new to preparedness (and sometimes even those with experience) often forget as they get ready. All five are common sense notions that do not rely on doomsday in order to be useful. It may be nice to own a tank during the apocalypse but there’s not much you can do with it until things get really crazy. The recommendations below can have places in the lives of average Americans whether doomsday comes or not.
Note: The information provided by this publication or any related communications is for informational purposes only and should not be considered as financial advice. We do not provide personalized investment, financial, or legal advice.
Secured Wealth
Whether in the bank or held in a retirement account, most Americans feel that their life’s savings is relatively secure. At least they did until the last couple of years when de-banking, geopolitical turmoil, and the threat of Central Bank Digital Currencies reared their ugly heads.
It behooves Americans to diversify their holdings. If there’s a triggering event or series of events that cripple the financial systems or devalue the U.S. Dollar, wealth can evaporate quickly. To hedge against potential turmoil, many Americans are looking in two directions: Crypto and physical precious metals.
There are huge advantages to cryptocurrencies, but there are also inherent risks because “virtual” money can become challenging to spend. Add in the push by central banks and governments to regulate or even replace cryptocurrencies with their own versions they control and the risks amplify. There’s nothing wrong with cryptocurrencies today but things can change rapidly.
As for physical precious metals, many Americans pay cash to keep plenty on hand in their safe. Rolling over or transferring retirement accounts into self-directed IRAs is also a popular option, but there are caveats. It can often take weeks or even months to get the gold and silver shipped if the owner chooses to close their account. This is why Genesis Gold Group stands out. Their relationship with the depositories allows for rapid closure and shipping, often in less than 10 days from the time the account holder makes their move. This can come in handy if things appear to be heading south.
Lots of Potable Water
One of the biggest shocks that hit new preppers is understanding how much potable water they need in order to survive. Experts claim one gallon of water per person per day is necessary. Even the most conservative estimates put it at over half-a-gallon. That means that for a family of four, they’ll need around 120 gallons of water to survive for a month if the taps turn off and the stores empty out.
Being near a fresh water source, whether it’s a river, lake, or well, is a best practice among experienced preppers. It’s necessary to have a water filter as well, even if the taps are still working. Many refuse to drink tap water even when there is no emergency. Berkey was our previous favorite but they’re under attack from regulators so the Alexapure systems are solid replacements.
For those in the city or away from fresh water sources, storage is the best option. This can be challenging because proper water storage containers take up a lot of room and are difficult to move if the need arises. For “bug in” situations, having a larger container that stores hundreds or even thousands of gallons is better than stacking 1-5 gallon containers. Unfortunately, they won’t be easily transportable and they can cost a lot to install.
Water is critical. If chaos erupts and water infrastructure is compromised, having a large backup supply can be lifesaving.
Pharmaceuticals and Medical Supplies
There are multiple threats specific to the medical supply chain. With Chinese and Indian imports accounting for over 90% of pharmaceutical ingredients in the United States, deteriorating relations could make it impossible to get the medicines and antibiotics many of us need.
Stocking up many prescription medications can be hard. Doctors generally do not like to prescribe large batches of drugs even if they are shelf-stable for extended periods of time. It is a best practice to ask your doctor if they can prescribe a larger amount. Today, some are sympathetic to concerns about pharmacies running out or becoming inaccessible. Tell them your concerns. It’s worth a shot. The worst they can do is say no.
If your doctor is unwilling to help you stock up on medicines, then Jase Medical is a good alternative. Through telehealth, they can prescribe daily meds or antibiotics that are shipped to your door. As proponents of medical freedom, they empathize with those who want to have enough medical supplies on hand in case things go wrong.
Energy Sources
The vast majority of Americans are locked into the grid. This has proven to be a massive liability when the grid goes down. Unfortunately, there are no inexpensive remedies.
Those living off-grid had to either spend a lot of money or effort (or both) to get their alternative energy sources like solar set up. For those who do not want to go so far, it’s still a best practice to have backup power sources. Diesel generators and portable solar panels are the two most popular, and while they’re not inexpensive they are not out of reach of most Americans who are concerned about being without power for extended periods of time.
Natural gas is another necessity for many, but that’s far more challenging to replace. Having alternatives for heating and cooking that can be powered if gas and electric grids go down is important. Have a backup for items that require power such as manual can openers. If you’re stuck eating canned foods for a while and all you have is an electric opener, you’ll have problems.
Don’t Forget the Protein
When most think about “prepping,” they think about their food supply. More Americans are turning to gardening and homesteading as ways to produce their own food. Others are working with local farmers and ranchers to purchase directly from the sources. This is a good idea whether doomsday comes or not, but it’s particularly important if the food supply chain is broken.
Most grocery stores have about one to two weeks worth of food, as do most American households. Grocers rely heavily on truckers to receive their ongoing shipments. In a crisis, the current process can fail. It behooves Americans for multiple reasons to localize their food purchases as much as possible.
Long-term storage is another popular option. Canned foods, MREs, and freeze dried meals are selling out quickly even as prices rise. But one component that is conspicuously absent in shelf-stable food is high-quality protein. Most survival food companies offer low quality “protein buckets” or cans of meat, but they are often barely edible.
Prepper All-Naturals offers premium cuts of steak that have been cooked sous vide and freeze dried to give them a 25-year shelf life. They offer Ribeye, NY Strip, and Tenderloin among others.
Having buckets of beans and rice is a good start, but keeping a solid supply of high-quality protein isn’t just healthier. It can help a family maintain normalcy through crises.
Prepare Without Fear
With all the challenges we face as Americans today, it can be emotionally draining. Citizens are scared and there’s nothing irrational about their concerns. Being prepared and making lifestyle changes to secure necessities can go a long way toward overcoming the fears that plague us. We should hope and pray for the best but prepare for the worst. And if the worst does come, then knowing we did what we could to be ready for it will help us face those challenges with confidence.
