Look forward to moderating inflation, 2% to 3% growth and full employment in 2022, according to Ben Bernanke.
Bernanke was a keynote speaker yesterday at the opening day of the Schwab IMPACT conference, which was held virtually. He served as chair of the Federal Reserve Board from 2006 to 2014, a period which included the financial crisis. He spoke on a panel along with Mark Carney, a former governor of the Bank of England.
The U.S. economy slowed in the second half of this year, Bernanke said, as monetary and fiscal support waned, and unemployment declined. Vaccine reluctance and supply chain shortages, along with issues in the labor market, mean that we should expect 5% to 6% growth this year and 3% next year.
It is one of the “oddest” labor markets ever, he said. Employment is five million below trend, but there are record job vacancies due to people “taking their time” to decide on their career path.
By next September, he expects the U.S. to be at full employment.
The Fed succeeded in getting inflation higher than it wanted, Bernanke said, but it will moderate and come down to a level that the Fed is comfortable with.
Carney agreed that the labor market was the economy’s biggest challenge, and will be determinative of future inflation, more so than supply chain issues.
The labor participation rate normally increases during a recovery. But it has been stable at 61%, perhaps due to workers taking early retirement. There will be some “reallocation” – people coming back to different jobs – Bernanke said. But he stopped short of calling this a structural change in the labor market.
“People are taking their time to figure out exactly where they want to go from here,” Bernanke said.
Carney noted that workers have been staying in the labor market longer for the last 15 years, and that has supported post-financial crisis growth. But now older workers may be choosing to exit the labor market.
Over a two- or three-year horizon things will level out, Carney said. The challenge for policy makers is to judge how much of the labor shortage will be permanent because that will affect inflation.
Bernanke noted that the Fed has 400 PhD-level economists working on issues like inflation, and they look at data such as restaurant seatings and TSA check-ins. “But it is hard to figure out how long it will take for the supply chain issues to be resolved,” he said. He was similarly hesitant to predict when the virus would subside to a level that would support growth.
Carney said that the U.S., U.K. and Canada have been better at adapting to the pressures of lockdowns than other developed countries. But he said that the virus is an issue throughout the supply chain, and its effect, particularly in Asia, has had knock-on effects globally.
The supply chain issue has a structural component, as consumers shifted consumption from the service sector (e.g., restaurants) to goods (e.g., exercise equipment). This has taxed the supply chain in unexpected ways, Bernanke said. The supply chain is fragile, he said, because of low, “just-in-time” inventories that are vulnerable to disruptions, and that is compounded by consumer hoarding.
As the virus comes under control and consumers go back to a normal mix of goods and services, the market will respond. Inflation is one of those responses. The system will find solutions, he said, even though the Christmas rush will be upon us.
Inflation will begin to moderate in 2022, Bernanke said.
The question is not whether inflation is transitory, Carney said; it is whether inflation becomes embedded in people’s expectations. He agreed that the supply chain issues will dissipate over the next year, as will high energy prices.
Carney also agreed that inflation will come down by the second half of next year.
Carney said he would much rather be in this situation, with strong growth, clean balance sheets and the core of the financial system in good health, than in a slow recovery with flat to falling prices.
Bernanke said the Fed used to change interest rates without notice, and it now gives guidance on its policies and planning. It has said it won’t move rates up until it achieves 2% inflation, which it has, and there is full employment, which has not yet been accomplished. He expects the “taper” to proceed, and for slow rate increases later next year provided inflation is controlled and full employment is achieved.
The Fed will taper in November, Bernanke said, and a year later will raise rates. “That is appropriate,” he said.
Carney said that monetary policy has not been terribly accommodative in the last decade, “perhaps a little too tight.” Now there are some structural shifts in the economy, he said. The Fed won’t raise rates until it achieves full employment. The challenge, in a shifting labor market, is what is the appropriate level of full employment.
“You know it when you see it when you get to full employment,” Carney said, “through the dynamics of wage levels.”
Stagflation is unlikely, Bernanke said, because we are seeing strong growth, which is indeed a driver of inflation. We are on a trajectory that will take us to more moderate inflation, perhaps above target, and 2% to 3% growth. He hopes that work-from-home and biomedical and technology advances will increase productivity, which is the opposite of stagflation.
Cryptocurrencies are operating in their own universe and won’t be a challenge to the dollar or to the operation of the financial system, Carney said. The key question is the role of stable coins, which are theoretically backed by risk-free assets. Central banks need stability and stable coins are like money market funds, which are tightly regulated. We will end up with a central bank digital currency, Carney predicted, that will replace stable coins that lack proper regulation. “The core of the financial system has to be rock-solid,” Carney said.
Bitcoin and other similar cryptocurrencies are neither money nor a currency, Bernanke said, because they are too volatile and not accepted in transactions. They are a “speculative asset with a lot of risk” because there are very serious regulatory concerns. They will not replace the dollar, euro or yen.
Bernanke said that the Fed will, over a period of time – at least two to three years – offer a central bank digital dollar. But that has not been decided. The Fed does not want to be a retail bank, so it will need to develop a partnership with banks and technology providers to build this, and it needs support from Congress.
Robert Huebscher is the founder and CEO of Advisor Perspectives.
More Schwab IMPACT Conference Topics >
