Recently, because of the continuous escalation of the Russian-Ukrainian conflict, crude oil prices soared to more than $110 at the fastest speed in four decades, a new round of oil crisis is raging, and the high oil prices have made the already high pressure on the inflation level of the United States increase sharply, at this time, for Powell, it needs to face the biggest test of his Fed presidency: on the one hand, high inflation, and even acceleration; on the other hand, it is an increasingly fragile financial market, and the volatility of US stocks in 2022 has suddenly increased. Crashing stocks abound, including star companies such as Meta, Netflix, PayPal, Shopify, snowflake and more.
For Powell, there are currently two options:
First, with inflation control as the primary goal, regardless of other resistances, rapidly raise the level of the federal funds rate and then quickly shrink the balance sheet;
The second is to continue to balance inflation control and asset prices, after all, the US stock market is now the main investment market for pensions in rich countries around the world, and will face various pressures, and if the market falls sharply, Powell will face greater pressure.
At this time, how should Mr. Good Mr. Powell choose? Will he become the "inflation fighter" Of the year, Volcker?
In his lifetime, Volcker experienced many major events, including the collapse of the Bretton Woods system, the dollar crisis, the stagflation crisis of the 70s, and the financial crisis of 2008.
From 1969 to 1974, he served as deputy treasury secretary for monetary affairs in the Nixon administration, where he dominated the decoupling of the dollar from gold and the end of the "Bretton Woods system." After the collapse of the Bretton Woods system, the Cold War and other factors led to a sharp rise in oil prices, after the oil crisis in 1973, inflation became a nightmare for americans, from the above chart you can see that from 1973 to the United States CPI soared from 5% all the way up, and in 1980, the CPI touched a peak of more than 14%, inflation rose sharply, resulting in the public for the economy to lose confidence in the dollar.
In August 1979, the appointment to change the course of history appeared, Volcker was appointed as the chairman of the Federal Reserve, and the control of inflation naturally became the most important thing after Volcker came to power, he raised interest rates all the way to the high of 22% directly tamed inflation, from the above figure can be clearly seen that the Fed through aggressive interest rate increases finally pressed inflation down, but also made the US economy return to normal, and laid the independent status of the Fed in one fell swoop, Volcker's feat in the 80s is called "turning the tide" A blow.
Forbes magazine called Volcker a Fed titan, the media called him an "inflation fighter" without fear of political pressure, and Bloomberg wrote in an article, "In his career of more than half a century, Volcker often played the role of a firefighter." A Financial Times commentator said, "Volcker is the greatest man he knows." He was born with some wonderful qualities that ordinary people cannot match: integrity, wisdom, prudence, and a passion for serving the country. ”
Today, Powell is also facing the same situation as Volcker in that year, compared with the hyperinflation at that time, the CPI does not seem to be so outrageous when Powell takes over.
Washington, Feb. 10 (Ap. D.) The U.S. Department of Labor released data showing that the U.S. Consumer Price Index (CPI) rose 0.6 percent month-on-month and 7.5 percent year-over-year in January 2022, the biggest year-over-year increase since February 1982. Excluding volatile food and energy prices, the U.S. core CPI rose 0.6% month-on-month and 6% year-over-year, the data showed, the largest year-on-year increase since August 1982.
Specifically, rising prices such as energy and cars continued to be the main factors driving prices in January. Energy prices rose 0.9% month-on-month and 27% year-on-year; in terms of cars, new car prices were flat with the previous month, up 12.2% year-on-year; used car prices rose 1.5% month-on-month and soared 40.5% year-on-year. In addition, housing prices increased by 0.3% month-on-month and 4.4% year-on-year, while food prices rose 0.9% month-on-month, an increase of 7% year-on-year. In terms of wages, the average hourly wage in January rose by 0.7% month-on-month, but after subtracting inflation, the real hourly wage increased by only 0.1%.
For the CPI in the United States, the main energy price and car prices soared, energy is mainly insufficient supply, and the car is mainly due to the global lack of chips leading to the interruption of the automotive industry chain, the shortage of automobile supply, which is also the us president of the United States recently frequently shouted to Tesla and other electric vehicle companies to reduce the price of the core reason, soaring car prices is another core driving force to push up CPI.
Today's U.S. stock market has long been comparable, the assets of the world's major rich countries are in the U.S. stock market, so Powell's aggressive interest rate hike will inevitably face more resistance if it leads to a market crash, but if inflation continues to rise above expectations, the Fed's credibility is in jeopardy, this is the current dilemma, for Powell, it is like a snail shell to do the dojo, there is not much room to play.
In the view of Yan Caijun, Powell could not be as decisive as Volcker was then, and he was more constrained by things, and he could not act like Volcker did back then, becoming a fighter who only controlled inflation, regardless of other influences.
And Powell is facing a better situation than he was then:
1. The United States' own crude oil and shale oil production capacity has been significantly enhanced, has become a crude oil exporter, although the United States on the one hand imports a large amount of oil, but also a large number of crude oil exports, and a large number of reserves of crude oil, is the world's largest crude oil reserve country:
The United States exported an average of 3.8 million barrels of crude oil per day in 2019, while imports amounted to about 3.5 million barrels per day.
According to the analysis of relevant scholars, the United States controls the world's largest oil circulation link; the United States exports more than 200 million tons of crude oil every year, and imports about 2,800 million tons of high-quality crude oil every year. In addition, the United States is the world's largest oil reserve country, with a strategic petroleum reserve of 1.1 billion barrels. How to grasp the world's largest oil circulation link by buying a large amount of money, selling a lot of money and having a large reserve every day, can control the global oil price first-hand, and then consolidate the position of the petrodollar. Another reason is that the United States exports oil called "shale oil", with more grades and impurities, buying high-quality crude oil from the Middle East and selling low-grade oil, and americans are shrewd! With 1.1 billion barrels of huge oil reserves, Americans have taken out a large reserve of oil to stabilize world oil prices when international crude oil prices fluctuate greatly. To put it bluntly, the Americans do not let anyone control the fate of global oil, including OPEC and Russia, etc. Only by controlling the lifeblood of the global economy can the status of the US dollar be consolidated and the global hegemony of the United States be maintained!
2. For the CPI, a potential positive for Powell is that with the past peak of Thermokeron's spread, the global semiconductor supply is gradually recovering, and the problem of car core shortage is expected to improve quarter by quarter, which is good for inflation repair.
Therefore, Yan Caijun predicted that Mr. Powell, at the beginning, will still raise interest rates moderately, and step by step to keep an eye on inflation data, if inflation is moderated, the process of interest rate hikes will be reduced, if it continues to exceed expectations, it will accelerate, after all, the market's affordability and protection of the economy must be taken into account.