Powell on Inflation 

Doug Nolan


The spike in Treasury yields runs unabated. Ten-year Treasury yields rose another 10 bps this week to 1.72%, the high since January 23, 2020. 

The Treasury five-year “breakeven” inflation rates rose to 2.65% in Tuesday trading, the high since July 2008. 

The Philadelphia Fed’s Business Survey Prices Paid Index surged to a 41-year-high. 

In the New York Fed’s Manufacturing Index, indices of Prices Paid and Received both jumped to highs since 2011.

While crude oil’s notable 6.4% decline for the week spurred a moderate pullback in market inflation expectations (i.e. “breakeven rates”), this did not translate into any relief in the unfolding Treasury bear market. 

Chairman Powell was widely lauded for his adept handling of Wednesday’s post-FOMC meeting press conference. 

He was well-prepared and could not have been more direct: The Federal Reserve will not anytime soon be contemplating a retreat from its ultra-dovish stance. 

It was music to the equities mania, as the Dow gained 190 points to trade above 33,000 for the first time. 

Treasury yields added a couple bps, but without any of the feared fireworks. Markets were breathing a sigh of relief.

Labored breathing returned Thursday. 

Ten-year Treasury yields spiked another 10 bps, trading above 1.75% for the first time since January 2020. 

And after trading as low as 0.76% during Powell’s press conference, five-year Treasury yields spiked to almost 0.90% in increasingly disorderly Thursday trading. 

The Nasdaq100 was slammed 3.1%, with the S&P500 sinking 1.5%.

The Treasury market would really like to take comfort from the Fed’s steadfast dovishness. 

It’s just been fundamental to so much. 

It’s worked incredibly well for so long. 

Clearly, it’s no longer working so well.

This raises a critical issue: Paradigm shift? 

Regime change? 

What’s driving Treasury yields these days? 

What is the bond market fearing? 

If it’s inflation, is Fed dovishness friend or foe?

March 16 – Financial Times (Joshua Oliver): 

“Coronavirus has been overtaken for the first time since the early days of the pandemic more than a year ago as the top risk that keeps investors up at night, according to a new poll of fund managers. 

Money managers polled by Bank of America now see inflation and an unruly rise in borrowing costs like that seen during the 2013 ‘taper tantrum’ as the key ‘tail risk’ that could unsettle global markets. 

The survey of investors with $597bn in assets… highlights investors’ concern that the economic recovery from Covid-19, backed by unprecedented stimulus, may unleash a surge of price growth that could be difficult to tame. 

Rising inflation expectations and bets that central banks, particularly the US Federal Reserve, may have to tighten policy sooner than planned have triggered a widespread sell-off in government bond markets — which investors worry could get worse.”

For the first time in years, bond markets face serious uncertainty with respect to inflation risk. 

The Fed’s balance sheet has doubled in only 79 weeks to $7.694 TN. 

Our Federal government is in the process of running consecutive years of $3.0 TN plus deficits. 

Chinese Credit (“aggregate financing”) expanded an unprecedented $5.4 TN last year and then added another Trillion in the first two months of 2021. 

On an unprecedented global basis, central bank balance sheets are expanding aggressively, while unbridled governments are running massive deficit spending programs. 

Forecasts are calling for upwards of 8.0% U.S. 2021 GDP growth, with an only moderately slower Chinese expansion. 

While the global economy is poised for recovery, it’s not at all clear governments will muster the resolve necessary to pull back meaningfully from unparalleled fiscal and stimulus. 

The world has never experienced such monetary inflation.

Long-term fixed-income securities have ample reason to fear a paradigm shift in inflation dynamics. 

And in this unfolding new environment, I don’t think the old “err on the side of ultra-dovishness” shtick is going to suffice. 

I found the Powell press conference problematic. 

After less than glorious market responses to his recent congressional testimony and WSJ Q&A session, I would have thought some tinkering of his messaging was in order. 

But Powell doubled down. 

No tapering or a move on rates is being contemplated – and the Fed will be providing ample warning well ahead of time. 

The FOMC is not concerned by what it views as a fleeting pop in inflation. 

It’s now well dug into its bunker mandate of promoting full employment, while mouthing - and praying for - price stability. 

Paul Kiernan from the Wall Street Journal (from Powell’s press conference): 

“My question is twofold. 

One, how high are you comfortable letting inflation rise? 

There is some ambiguity in your new target, as you mentioned - expectations driven. 

And do you think that that ambiguity might cause markets to price in a lower tolerance for inflation than the Fed actually has, thereby causing financial conditions to tighten prematurely? 

Is that a concern?”

Fed Chairman Jay Powell: 

“So, we’ve said we’d like to see inflation run moderately above 2% for some time. 

And we’ve resisted, basically, generally, the temptation to try to quantify that. 

Part of that just is talking about inflation is one thing. 

Actually having inflation run above 2% is the real thing. 

So, over the years, we’ve talked about 2% inflation as a goal, but we haven’t achieved it. 

So, I would say we’d like to perform. 

That’s what we’d really like to do is to get inflation moderately above 2%. 

I don’t want to be too specific about what that means, because I think it’s hard to do that. 

And we haven’t done it yet. 

When we’re actually above 2%, we can do that. 

I would say this: the fundamental change in our framework is that we were not going to act preemptively based on forecasts, for the most part. And we’re going to wait to see actual data. 

And I think it will take people time to adjust to that. 

And to adjust that new practice. And the only way we can really build the credibility of that is by doing it. 

So, that’s how I would think about that.”

Noland comment: 

The Fed picked an especially poor time to go rouge on inflation management. 

And this will not be the backdrop for Fed credibility to be on the ascend. 

With all the lip service paid to transparency, the Fed today cannot clarify its reaction function – what inflationary developments would spark concern at the FOMC as well as the measures the Fed would employ to counter mounting inflationary pressures. 

The Chair doesn’t “want to be too specific” because the FOMC doesn’t have a framework or a plan. 

Their latest experimental iteration – the adoption of an “inflation targeting” regime – was basically to ensure they retained the flexibility to remain ultra-dovish while disregarding their inflation target in the event of a breach above 2%. 

I doubt they ever contemplated how the committee would respond to a serious threat of entrenched inflationary pressures. 

No one believes the Fed will actually tighten policy.

Michael Derby from the Wall Street Journal: 

“I just wanted to get an updated view on your sense of your view on financial stability risks, and whether or not you see any pockets of excess out in financial markets that concern you either specifically to that area of the market or as in terms the threat that it can pose to the overall economy?”

Powell: 

“As you know, financial stability for us is a framework. 

It’s not one thing. It’s not a particular market or a particular asset or anything like that. 

It’s a framework that we have. 

We report on it semiannually. 

The board gets a report on it quarterly. 

And we monitor it every day. 

It has four pillars. And those are four key vulnerabilities: asset valuations; debt owed by businesses and households; funding risk; and leverage among financial institutions. 

Those four things, and I’ll just quickly touch on them.

If you look at asset valuations, you can say that by some measures some asset valuations are elevated compared to history, I think that’s clear. 

In terms of households and businesses, households entered the crisis in very good shape by historical standards. 

Leverage in the household sector had been just kind of gradually moving down and down and down since the financial crisis. Now, there was some negative effects on that. 

People lost their jobs and that sort of thing. 

But they’ve also gotten a lot of support now. 

So, the damage hasn’t been as bad as we thought. 

Businesses, by the same token, had a high debt load coming in. 

Many saw their revenues decline. 

But they’ve done so much financing, and there’s a lot of cash on their balance sheet. 

So, nothing in those two sectors really jumps out as really troubling.

Short-term funding risk as the last one. 

We saw, again, in this crisis, breakdowns in parts of the short-term funding markets - came under a tremendous amount of stress. 

And they’ve been quiet since the spring, and we shut down our facilities and all that. 

But we don’t feel like we can let the moment pass without just saying, again, that some aspects of the short-term funding markets – and more broadly nonbank financial intermediation – didn’t hold up so well under great stress - under tremendous stress. 

And we need to go back and look at that. 

So, a very high priority for us, as regulators and supervisors, is going to be to go back – this will involve all the other regulatory agencies. 

It does involve all of them… and see if we can strengthen those things. 

So, that’s a sort of a broader detailed look.”

Noland comment: 

This topic is worthy of a lengthy book. 

The Fed exhausts too much energy rationalizing its “full employment” and “stable prices” mandates, while neglecting it overarching responsibility to safeguard financial stability. 

Similar to its analytical approach to inflation, the Fed lacks a sound financial stability framework. 

“You can say that by some measures some asset valuations are elevated compared to history,” while a historic mania rages in equities, corporate Credit, ETFs, cryptocurrencies, NFT (“non-fungible tokens”), collectibles and such.

The Fed’s focus on household and corporate balance sheets needs to be supplanted by a more holistic approach to system finance. 

Treasury Securities have increased $17.55 TN, or almost 300%, since the end of 2007, with combined Treasury and Agency Securities up $20.3 TN. 

Over this period, the Fed’s balance sheet has inflated $6.7 TN, or over 700%. 

This unprecedented increase in government Credit has (almost singlehandedly) inflated incomes, asset prices and Household Net Worth. 

For the corporate sector, massive government monetary inflation has boosted cash-flows and earnings, while stoking loose financial conditions and associated gains to corporate equity and financing costs. 

Any legitimate analysis of financial stability must focus on profligate government finance while downplaying deceptive stability in the household and corporate sectors.

The Fed’s analytical framework is a contraption of the last war. 

The mortgage finance Bubble was chiefly fueled by a massive increase in household mortgage borrowings intermediated through the GSEs, the banking system, and securitization and derivatives marketplaces. 

All these sectors were heavily exposed to the bursting Bubbles in mortgage finance and housing. 

Today’s “government finance Bubble” is fueled chiefly by government debt and Federal Reserve liabilities. 

This perceived safe and liquid “money”-like Credit requires minimal risk intermediation through the banking system or markets. 

As such, the nature of the risks to financial stability are different in kind to those of mortgage Credit. 

Superficially, the banking system today appears well-capitalized and robust. 

From the prism of 2008, financial institutions more generally do not appear over-levered or heavily exposed to risky Credit. 

“We saw, again, in this crisis, breakdowns in parts of the short-term funding markets - came under a tremendous amount of stress.” 

Meanwhile, the government finance Bubble has spurred myriad and monumental “funding market” risks. 

For one, massive monetary inflation has fueled market manias, egregious speculation and unprecedented speculative leverage. 

This ensures illiquidity and dislocation in the event of any meaningful “risk off” de-risking/deleveraging episode. 

Zero rates and the search for yield have fomented speculative excess, leverage and epic market distortions – at home and internationally. 

Risk perceptions have been entirely subverted, from the standpoint of the Fed backstopping the securities markets and Washington, more generally, underpinning the U.S. Bubble Economy. 

In particular, I would point to the proliferation and incredible popularity of ETF products and associated inevitable liquidity issues as integral to this Bubble cycle’s unique risks to financial stability. 

The perception of safety and liquidity (“moneyness”) is fundamental to the widespread adoption of ETF products. 

As we witnessed again last March, when this misperception of moneyness is exposed, these products immediately become vulnerable to dislocation, panic and “investor” runs. 

From a financial stability standpoint, the Fed should be extremely concerned by Bubble Dynamic risk misperceptions and accumulating excesses and imbalances. 

Yet the Fed’s repeated market bailouts only solidify precarious market distortions while exacerbating the risk of a market crash. 

During the mortgage finance Bubble period, a “moneyness of Credit” dynamic was fundamental to market mispricing and risk distortions. 

Increasingly risky mortgage Credit was transformed into perceived safe and liquid “AAA” mortgage securities, allowing a prolonged period of Credit and risk intermediation excesses to impart deep structural impairment. 

When Ben Bernanke slashed rates to zero, adopted QE, and forced savers into the securities markets, I warned of a “moneyness of risk assets” dynamic. 

More than a decade of historic market intrusions have created a major threat to financial stability. 

A crisis of confidence and run on perceived safe securities appears unavoidable, and this threat has inflated profoundly following a year of egregious monetary inflation and market manipulation. 

And while “leverage among financial institutions” is an area of Fed focus, from a financial stability standpoint I would argue that speculative leverage throughout global markets these days creates preeminent risk for a market crash, vanishing perceived wealth, and a resulting devastating tightening of financial conditions.

The perceived “moneyness” of government Credit – along with the willingness to recklessly expand the Fed’s and federal government’s liabilities ad infinitum – creates a unique capacity to finance a most prolonged Bubble period. 

This ensures the deepest of structural impairment, along with devastating consequences come the inevitable crisis of confidence in government finance and policymaking.

Michael McKee from Bloomberg: 

“Before 2019 you were focused on the problems with having interest-rates too low. 

Now are you saying we’re willing to live with it until we reach these goals, even if you hit your goal on maximum employment?”

Powell: 

“What I would say is we’re committed to giving the economy the support that it needs to return as quickly as possible to a state of maximum employment and price stability. 

And to the extent having rates low and support for monetary policy broadly - to the extent that raises other questions, we think it’s absolutely essential to maintain the strength and stability of the broader financial system and to carefully monitor financial stability questions…

We monitor that very carefully. I would point out that over the long expansion - longest in U.S. history; 10 years and eight months - rates were very low. 

They were at zero for seven years, and then never got above 2.4%, roughly. 

During that we didn’t see, actually, excess buildup of debt. 

We didn’t see asset prices forming to bubbles that would threaten the progress of the economy. 

We didn’t see a housing bubble.

The things that have tended to really hurt an economy - and have in recent history hurt the U.S. - we didn’t see them build up despite very low rates. 

Part of that just is that you’re in a low rate environment. 

You’re in a much lower rate environment, and a connection between low rates and the kind of financial instability issues is just not as tight as people think it is. 

That’s not to say we ignore it. 

We don’t ignore it. 

We watch it very carefully. 

And we think there is a connection. 

I would say there is, but it’s not quite so clear. 

We actually monitor financial conditions very, very broadly and carefully. 

And we didn’t do that before the global financial crisis 12 years ago. 

Now we do.

And we’ve also put a lot of time and effort into strengthening the large financial institutions that form the core of our financial system - are much stronger, much more resilient. 

That’s true of the banks. 

I think it’s true of the CCPs (central counterparties). We want it to be true of other non-bank financial intermediation markets and institutions.

Monetary policy should be, to me, provided for achieving our macroeconomic gains. 

Financial regulatory policy and supervision should be for strengthening the financial system so that it is strong and robust and can withstand the kind of things that it couldn’t, frankly. 

And we learned that in 2008, ’09, ‘10. 

This time around, the regulated part of the financial system held up very well. 

We found some other areas that need strengthening, and that’s what we’re working on now.”

Noland comment: 

I abhor historical revisionism. 

“Rates were very low. 

They were at zero for seven years… During that we didn’t see… excess buildup of debt. 

We didn’t see asset prices forming to bubbles… 

We didn’t see a housing bubble.” 

When it comes to an excessive buildup of debt, I would direct Chairman Powell to his institution’s quarterly Z.1 reports. 

U.S. Non-Financial Debt (NFD) ended 2007 at $33.4 TN (230% of GDP). 

It closed out 2020 at $61.167 TN, or a record 292% of GDP. 

After ending ’07 at $8.1 TN (55% of GDP), Treasury Liabilities surged $18.4 TN, or 228%, to $26.4 TN, or a record 123% of GDP. 

And perhaps a comparable buildup of debt would be associated with “carry trades,” derivative-related leverage, margin debt, and myriad forms of speculative leverage. 

Why did the Fed abandon its 2011 “exit strategy” – moving instead to again double its balance sheet in three years to $4.5 TN? 

Why was the Fed so petrified by “taper tantrums” and “flash crashes”? 

Why in 2013 was Bernanke compelled to assure the market the Fed would “push back against” a tightening of financial conditions, essentially signaling the Federal Reserve would not tolerate a pullback in equities prices? 

After one little baby-step off the zero bound in December 2015, why did the Yellen Fed then put rate “normalization” on hold for a full year? 

And, Mr. Chairman, why did you so abruptly pivot back to dovishness in response to market instability back in December 2018? 

And why a year later would the Fed restart QE despite stocks at record highs and unemployment at multi-decade lows? 

Moreover, why in 2020 was the Fed forced to resort to in excess of $2.5 TN of QE over an about two month period – and then stick with $120 billion liquidity injections despite securities market recovery and conspicuous signs of a full-fledged mania? 

Why today such resolve to signal ultra-dovishness? 

Clearly, the Fed has for years understood the risks associated with piercing market Bubbles. 

Don Lee from the Los Angeles Times. 

“As you know, households are sitting on a lot of excess savings. 

And I wonder if combined with that you have an unleashing of pent up demand, how much do you think that would affect inflation? 

And would you expect that to be transitory?”

Powell: 

“We, everyone who’s forecasting these, what we’re all doing is we are looking at the amount of savings - we have reasonably good data on that. 

And we’re looking at the government transfers that will be made as part of the various laws. 

And we’re trying to make an assessment on what will be the tendency of people to spend that money, the “marginal propensity to consume”.

And from that you can develop an estimate of the impact on spending, on growth, on hiring, and, ultimately, on inflation.

 So that’s what we’re all doing. 

And we can look at history, and we can make estimates, and those are all very transparent and public, and you can compare one to the other. 

And, of course, we’ve all done that. 

And I think we’ve made very conservative assumptions, and sensible mainstream assumptions at each step of that process.

And what it comes down to… is there very likely will be a step up in inflation as March and April of last year dropped out of the 12-month window, because they were very low inflation numbers. 

That’ll be a fairly significant pop in inflation. 

It will wear off quickly though, because it’s just the way the numbers are calculated. 

Past that, as the economy reopens, people will start spending more. 

You can only go out to dinner once per night, but a lot of people can go out to dinner. 

They’re not doing that now. 

They’re not going to restaurants; not going to theaters. 

That part of the economy - travel and hotels - that part of the economy is really not functioning at full capacity. 

But as that happens, people can start to spend.

It also wouldn’t be surprising if - and you’re seeing this now particularly in the goods economy – there’ll be bottlenecks. 

They won’t be able to service all of the demand, maybe for a period. 

So, those things could lead to - and we’ve modeled that, other people have to - and what we see is relatively modest increases in inflation. 

But those are not permanent things. 

What will happen is the supply side - the supply side in the United States is very dynamic - people start businesses, they reopen restaurants, the airlines will be flying again. 

All of those things will happen. 

And so, it’ll turn out to be a one-time sort of bulge in prices. 

But it won’t change inflation going forward. 

Because inflation expectations are strongly anchored around 2%. 

We know that inflation dynamics do evolve over time. 

There was a time when inflation went up it would stay up. 

And that time is not now. 

That hasn’t been the case for some decades. 

And we think it won’t suddenly change to another regime. 

These things tend to change over time, and they tend to change when the central bank doesn’t understand that having inflation expectations anchored at 2% is the key to it all.

Having them anchored at 2% is what gives us the ability to push hard when the economy is really weak. 

If we saw inflation expectations moving materially above 2%, of course, we would conduct policy in a way that would make sure that that didn’t happen. 

We’re committed to having inflation expectations anchored at 2%, not materially above or below 2%. 

So, if you look at the savings, look at all of that, model it, that’s kind of what comes out of our assessment. 

There are different possibilities. 

I think it’s a very unusual situation to have all these savings, and this amount of fiscal support and monetary policy support. 

Nonetheless, that is our most likely case. 

As the data come in and the economy performs, we’ll of course adjust. 

Our outcome-based guidance will immediately adapt, we think, to meet whatever the actual path of the economy is.”

Noland comment: 

Powell’s response to this inflation question is near the top of my list of why I disagree with the consensus view of a successful press conference. 

I’ll cut the Fed Chair some slack. 

He’s not a trained economist, while consumer price inflation has been rather subdued now for three decades. 

But I don’t think his rudimentary explanation of why inflation is not a concern is going to suffice. 

There is no consideration for the monumental shift to massive open-ended central bank monetary inflation on a global scale. 

No mention of the structural shift to colossal fiscal deficits and spending – again globally. 

How could such unleashing of government finance not impact global inflation dynamics? 

In Powell’s assessment there was no recognition of spiking global food prices. 

How can one have a thoughtful discussion about inflation prospects without recognizing myriad risks associated with global climate change? 

Future historians will look back to pandemic year 2020 as an inflection point of far-reaching consequence. 

It started with hording toilet paper. 

Now a global semiconductor shortage has entire industries scurrying to procure needed components. 

All types of supply chains have been disrupted. 

There are bottlenecks galore, and various shipping and transport channels are suffering disruptions and delays. 

From vaccines, to PPE, to semiconductors, shipping containers, rare earth metals, to food supplies and much beyond, I expect a major shift to nations taking pains to become more self-sufficient. 

Households, businesses and countries will hold more of many things in reserve. 

Hording – from foodstuffs to rare earths to semiconductors – is in. 

Just in time inventory management is out.

The prolonged Bubble period has greatly exacerbated wealth inequality. 

The inevitable swinging back of the pendulum has begun. 

Wealth redistribution policies will see mammoth transfer payments along with higher wages. 

And as our nation moves toward massive investments in renewable energy and to upgrade neglected infrastructure, the momentous change in the flow of finance from the asset markets to real economy investment will further promote a transformation of inflation dynamics.

Risks to the inflation outlook are real. 

The odds that we are at the precipice of a major shift in inflation dynamics are not low. 

At the same time, the Fed is completely unprepared – both intellectually and from a policy perspective. 

Historic Bubbles have left the Federal Reserve lacking flexibility and objectivity: it will doggedly dismiss inflation risk and hope for the best. 

The fragile four

Which emerging markets are most exposed to a Treasury tantrum?

Some countries may be victims of their own success


There are few greater honours than becoming finance minister of your country. 

But there are better and worse days to start the job. 

Chatib Basri became finance minister of Indonesia, the fourth-most-populous country in the world, on May 21st 2013. 

That was only a day before the start of a financial sell-off known as the “taper tantrum”. 

Yields on American Treasuries rose abruptly after Ben Bernanke, then chairman of the Federal Reserve, spoke about reducing (or tapering) the Fed’s bond purchases. 

Higher American yields shattered the appeal of emerging markets, undermining their currencies, bonds and shares. 

“I had very little time to adjust,” Mr Basri noted in 2016.

Policymakers in emerging markets now fear a second such tantrum. 

As Treasury yields jumped at the end of last month, a broad index of emerging-market shares fell by over 7% in little more than a week. 

This is “shaping up to be a bruiser”, wrote Robin Brooks of the Institute of International Finance, a bankers’ group, on Twitter. 

Markets have calmed down in recent days. 

But if they again lose their composure, which emerging economies will be worst hit and why?

One way to identify future casualties is to look at the characteristics of past victims. 

Back in 2013 Indonesia was one of an unfortunate group of emerging markets dubbed the “fragile five” by James Lord of Morgan Stanley, a bank. 

The group, which also included Brazil, India, South Africa and Turkey, were all struggling with inflationary pressure, an overvalued exchange rate and a conspicuous current-account deficit (which measures a country’s trade deficit among other things). 

A few months into the tantrum Indonesia reported that its deficit had increased to 4.4% of gdp. 

The “market went into shock”, Mr Basri recalls.

Similar factors were combined into a “vulnerability index” by the Fed’s own economists in 2014. 

For the most part, the worse a country scored on the index, the more its currency fell in the taper tantrum. 

This kind of evidence has prompted Fed officials ever since to argue that the sensitivity of emerging markets to the Fed’s words and deeds depends a lot on economic fundamentals in the emerging markets themselves.

To the Fed’s critics, that can sound like blaming the victim. 

But it is also a hopeful message. 

It implies that emerging markets have some control of their own fates. 

They are not “purely passive objects of the effects of Fed policy decisions”, as Mr Bernanke put it in 2015. 

Mr Basri has recounted the numerous measures he and other policymakers introduced to make Indonesia less fragile. 

They narrowed the country’s current-account deficit by raising interest rates, tightening credit regulations and cutting fuel subsidies, despite the political damage that would ensue. 

Cabinet discussions were very “dynamic”, Mr Basri writes.

Indeed, judged by the criteria of 2013, emerging markets today look far less fragile than they once were. 

Inflation is lower (only 1.4% in Indonesia) and “exchange-rate valuations have cheapened up considerably”, says Mr Lord. 

Their current accounts are also “much improved”. 

Indonesia’s is now in surplus, as are India’s and South Africa’s.

These past indicators of fragility, however, may not be appropriate for 2021. 

The pandemic has depressed demand and curtailed imports, which has temporarily narrowed current-account deficits around the world. 

But the fight against covid-19 has also dramatically widened another kind of deficit: the gap between government spending and revenues. 

Budget deficits averaged over 10% of gdp across the fragile five last year, according to the imf. 

Fiscal sustainability “has become the key macro area of concern for some emerging markets”, Mr Lord says.

Bond strategists at hsbc, a bank, published an alternative ranking of vulnerable emerging economies on March 2nd. 

The least resilient, according to their scorecard, are Brazil, Indonesia, Mexico and South Africa. 

These economies have all been prone to current-account deficits in recent years, even if the pandemic has flattered the latest figures. 

And sizeable government debt in South Africa and especially Brazil leaves them exposed to any jump in interest rates, which are now unusually low.

The fairweather four

These are not the only potential sources of vulnerability. 

When American yields rise and the dollar strengthens, countries that have borrowed heavily in hard currencies find their debts harder to bear. 

But the trouble need not end there, according to Valentina Bruno of the American University in Washington, dc, and Hyun Song Shin of the Bank for International Settlements (bis). 

Any deterioration in the creditworthiness of one borrower in an international lender’s portfolio can limit the risks it is willing to take on other emerging markets, even those that mostly borrow in their own currency. 

Boris Hofmann and Taejin Park of the bis have shown that a rising dollar is a particular danger to emerging markets that have sold a large share of their bonds to foreigners. 

One reason why Mexico is on hsbc’s worry list and Turkey is not is that foreigners hold 46% of Mexico’s local-currency government bonds and less than 7% of Turkey’s.

These findings create a headache for conscientious finance ministers in emerging markets. 

If they strive to reform their economies to make them less fragile, they will become more attractive to foreign investors, who will then snap up a greater share of their bonds. 

But that could make them more vulnerable to a sell-off whenever global financial conditions darken. 

Indonesia’s reforms after the taper tantrum soon won praise from the imf and attracted foreign buyers back to its bond market. 

But, Mr Basri admits, these inflows increased the vulnerability of Indonesia’s economy to a reversal when global markets wobbled again in 2015. 

Emerging economies are not powerless victims of the Fed. 

But they can be hapless victims of their own success.

Trade unions are back after a long absence

Covid and the rise of the gig economy are driving recruitment, but unions need to modernise, too

Sarah O’Connor

© James Ferguson


At 21 years old, Alfie already knows a fair bit about working life on the bottom rungs of the UK economy. 

He has worked in a seatbelt factory (“you’re just there to look after the machines basically”), a toilet paper factory and a popular coffee shop chain. 

But it never occurred to him to join a trade union until the pandemic hit.

Worried about the café’s policies on infection control, furlough and sick pay, he and a group of other staff began to share stories on Facebook. 

They set up a petition on a digital platform that connects workers and helps them run campaigns. 

It now has more than 37,000 signatures. Alfie has joined the Bakers, Food and Allied Workers Union, which helped with the campaign.

“Thanks to the pandemic I think there’s going to be a massive resurgence in the idea of unions because so many people, especially young people, have realised how vulnerable they are to the whim of their employer,” he says. 

“They feel they haven’t got any power.”

If he is right, it would mean the reversal of a trend that has lasted more than 30 years and spanned most of the developed world. 

Since 1985, trade union membership has halved on average across OECD countries, while coverage of collective agreements signed at the national, sector or company level has declined by a third.

There is still huge variety between countries in terms of the importance and popularity of unions (4.7 per cent of employees in Estonia are members, 93 per cent in Iceland). 

But the majority of places have experienced a decline. Nowhere is this more evident than among the young. 

In 1995, one in five 20- to 25-year-olds in the UK were union members; now it is about one in 10.

There are now some reasons for trade unionists to be optimistic. 

When Boris Johnson, the UK prime minister, told people to go back to work after the first lockdown, the website that helps people find a trade union to join had more hits than ever before. 

Organise, the worker campaign platform, had fewer than 100,000 members this time last year; now it has more than 1m.

In an Amazon warehouse in Alabama, meanwhile, almost 6,000 workers are voting this month on whether to unionise. 

The impetus for the union drive is less about pay and more about the way workers are paced by robots and monitored by algorithms. 

It is a totemic battle for the US’s beleaguered unions, which want to show they have a role in the 21st-century economy.

The politics have shifted in some countries, too. 

Joe Biden, US president, has warned Amazon not to intimidate workers in Alabama, and has already edged institutions such as the National Labor Relations Board in a more pro-union direction. 

New Zealand, which deregulated and de-unionised its labour market in the 1990s, is now planning a system where workers and employers will bargain to put a floor on wages and conditions across certain sectors or occupations.

This reflects a quiet change in economic orthodoxy. 

As Alan Manning, economics professor at the London School of Economics, says: “It’s incredibly popular among young economists now to think the balance of power between labour and capital has gone too far.” 

The OECD, hardly a hotbed of socialism, argues that collective bargaining “should be mobilised to help workers and companies face the transition and ensure an inclusive and prosperous future of work”. 

The organisation reasons that while important, laws and regulations are not as responsive as good industrial relations, particularly with regards to the deployment of automation or electronic surveillance.

The question is whether unions themselves are fit for the future. 

Some have adapted well to the changing needs of workers. 

Germany’s IG Metall, for example, has opened up to self-employed members and collaborated with Swedish white-collar union Unionen to help workers on “crowd labour” platforms. 

But others are stuck in the past, dominated by structures and work cultures from the 1970s that leave them with no high ground from which to criticise private-sector employers.

GMB, one of the UK’s big unions, commissioned an investigation by a lawyer last year into allegations of sexual harassment. 

The report said “bullying, misogyny, cronyism and sexual harassment are endemic” in the union, which was run like a series of “fiefdoms”. GMB, which published the investigation in full, says it will “face up to and tackle” the problems.

Platforms such as Organise and new start-up unions like the Independent Workers Union of Great Britain, unencumbered by old structures, have found ways to reach people that traditional unions have struggled to recruit, such as Deliveroo riders and other gig workers. 

IWGB has won some big legal victories, but its day-to-day work involves helping app workers with practical problems such as being deactivated with no explanation. 

While some traditional unions have sought to collaborate and learn from these new arrivals, others have treated them with suspicion or denial. 

“We’re just going to be eaten like Netflix ate Blockbuster if we don’t shake it up,” one trade unionist said.

The pandemic has prompted workers like Alfie to raise their voices and their sights. 

It means that unions have the best opportunity in decades to renew themselves and their place in the economy. 

Whether or not they seize it will be up to them.

The US Recovery’s Promising Moment

Recent macroeconomic figures and the accelerating pace of COVID-19 vaccination suggest that optimism about the US economy's prospects is justified. But to avoid snatching defeat from the jaws of victory, policymakers must press ahead with measures to lock in robust, sustainable, and inclusive long-term growth.

Mohamed A. El-Erian



LAGUNA BEACH – President Joe Biden’s announcement that the US will have enough COVID-19 vaccines for every American by the end of May has contributed to a rising tide of optimism about the country’s economic prospects this year. 

This, and other good reasons to be hopeful about the economy, opens a valuable window for the administration to address the complex policy challenges it is facing in 2021 and beyond.

On the positive side, Biden’s vaccine announcement came on the heels of economic data that beat the consensus expectations of economists and market analysts. 

The latest figures show that personal income grew by 10% between December and January, that manufacturing expanded by nearly ten percentage points year on year, and that 379,000 jobs were created in February (well above the consensus expectation of some 200,000). 

In keeping with with these trends, the Federal Reserve Bank of Atlanta’s much-watched (and notably volatile) GDPNow model now estimates annualized first-quarter GDP growth to have reached around 10%.

This notable economic pickup is being driven by the release of pent-up demand – both in the US and internationally – and by the fiscal stimulus package that Congress approved at the end of last year. 

Moreover, these public- and private-sector effects are both likely to intensify as vaccines continue to be administered more quickly, and as the Biden administration progresses with its two-stage rescue and recovery effort.

But three main challenges will need to be addressed quickly. 

First, progress toward increased vaccine availability is necessary but insufficient. 

To end the public-health crisis, stepped-up vaccine production will need to be accompanied by a high rate of vaccine acceptance, vigilant efforts to prevent a resurgence of infections, and ongoing resilience in the face of new variants of the virus.

Second, with competing signals from different labor-market data, the pickup in economic activity has yet to be accompanied by a sustained, strong rebound in employment. 

Moreover, the labor-force participation rate needs to recover more strongly.

The third challenge is highlighted by the debate among economists about whether the Biden administration’s proposed $1.9 trillion American Rescue Plan will lead to economic overheating. 

The fear is that the additional stimulus will trigger a spike in inflation and market interest rates, which could derail a sustained recovery and heighten the risk of financial-market accidents. 

Indeed, in recent weeks, there have already been two near-accidents that, fortunately, were countered by endogenous market flows.

In thinking about these challenges, one also must look beyond 2021. 

To develop into the type of recovery the US (and global) economy needs and is able to deliver, the current economic bounce will need to prove durable, inclusive, and sustainable. 

Policymakers will not only have to avoid some significant pitfalls this year; they will also have to do more to counter the pandemic’s lingering aftereffects, particularly those that could undermine households’ balance sheets and hamper productivity and growth both at home and globally.

Judging by the current course of the recovery, major headwinds could emanate from several sources. 

These include the likely widening of the economic, financial, and health divergence between advanced and developing economies; the deepening disconnect between Main Street (economic and social conditions) and Wall Street (financial asset prices); sovereign- and corporate-debt challenges (particularly in the developing world); and the social, political, institutional, and economic fallout from the recent spikes in inequality of income, wealth, and opportunity.

Good policy design and implementation can do a lot to minimize these risks. 

But sustaining the recovery will require an ongoing policy push. 

After the $1.9 trillion bill passes, the US will need to move expeditiously to enact the Biden administration’s second proposed fiscal package, which is aimed squarely at boosting longer-term productivity and inclusive growth.

Moreover, US policymakers need to look closely at the functioning of the labor market, both directly and in cooperation with the private sector. 

And they will have to embrace the delicate task of rebalancing the macroeconomic mix so that there is less reliance on unconventional monetary policies (particularly open-ended large-scale asset purchases and highly repressed policy rates), and more emphasis on structural reforms and macro-prudential measures.

After the annus horribilis of 2020, there is justifiable optimism about the US economy. 

A compelling vision of a much brighter future is coming into sharper focus.

It can and should help policymakers to press ahead with preemptive action to mitigate the considerable risks on the horizon.

It would be a tragedy if world leaders were to repeat the mistakes of the post-2008 period, when it won the war against a depression but then failed to secure the peace through high, durable, inclusive, and sustainable growth. 

The US plays a critical role in this regard. 

By seizing the moment, policymakers can spare the US – and therefore the rest of the global economy – that unnecessary risk.


Mohamed A. El-Erian, an advisor to Allianz (the corporate parent of PIMCO where he served as CEO and co-Chief Investment Officer from 2007-14) and to Gramercy, is President of Queens’ College, University of Cambridge. He is is the Rene M. Kern Practice Professor at The Wharton School at University of Pennsylvania and was Chairman of US President Barack Obama’s Global Development Council. He previously served as CEO of the Harvard Management Company and Deputy Director at the International Monetary Fund. He was named one of Foreign Policy’s Top 100 Global Thinkers four years running. He is the author of two New York Times bestsellers, including most recently The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse.

Wall Street tests Jay Powell’s mettle as long-term bonds tumble

Federal Reserve’s low-rate approach sharpens investor angst inflation will run too hot

Colby Smith in New York

The ripple effect of Jay Powell’s hands-off approach to the rise in yields is spreading around the world’s bond markets © FT montage; Bloomberg


The US Federal Reserve is locked in a high-stakes showdown with markets.

This week, chair Jay Powell won plaudits for acknowledging a rapidly brightening economic outlook and the chance of a push higher in inflation, while emphasising his commitment to keeping interest rates at rock-bottom levels for the foreseeable future.

But this relaxed attitude to inflation is biting in to the price of long-term US government bonds, sending ripples across global markets. 

Despite Powell’s hands-off approach to the rise in yields, in contrast with his peers in the eurozone, investors are continuing to question how long the Fed can allow this to run.

“It is not the level of yields that matters, but how it interacts with risky assets,” said Gene Tannuzzo, global head of fixed income at Columbia Threadneedle Investments. 

“If yields are moving up at a pace that is causing the stock market to fall and credit spreads to widen, then [Powell] will be a lot more concerned.”

In just the past week, the yield on the benchmark 10-year note jumped as high as 1.75 per cent, having traded around 1.6 per cent just days earlier. 

Since the start of the year, long-dated Treasuries, which mature in 10 years or more, have dropped almost 15 per cent on a total return basis, according to a Bloomberg Barclays index. 

If those losses are sustained, the first quarter of this year will mark the worst since at least the early 1970s.


The decline reflects a large upgrade among economists of inflation and growth forecasts, and a suspicion that the Fed will eventually be forced to bring forward its first rise in interest rates.

The European Central Bank has pushed back against the rise in yields on its turf, fearing a harmful rise in borrowing costs for companies and individuals at a delicate economic juncture. 

In contrast, the Fed chair has brushed off any unease, despite the ferocity of the move at times, in sharp contrast with the March 2020 episode when policymakers were in constant contact with banks and other market participants about the chaotic market moves.

The swiftness of the sell-off, which has begun to spill over into equity and credit markets, has rattled investors. 

In February, yields breached even some of the toppiest forecasts for the year, after a poorly received Treasury auction kicked off choppy trading.

Powell again dismissed the recent gyrations in the $21tn market for US government debt on Wednesday, reiterating that financial conditions across a variety of metrics remained “highly accommodative” and that the central bank would be concerned only about “disorderly” moves that threaten to undermine the economic recovery. 

To drive home the point, he suggested no intention to adjust the Fed’s $120bn monthly bond-buying programme.


“The market might push them to make a change in their behaviour but for now [Fed policymakers] have clearly indicated they do not want to directly participate in having an impact on the yield curve,” Rish Bhandari, a senior portfolio manager at hedge fund Capstone, said.

Mike Collins, senior portfolio manager at PGIM Fixed Income, warned that another sharp rise in Treasury yields could test their stance, however.

“Financial conditions do remain pretty loose, but if rates go up another [0.5 to 1 percentage point], that could really slow things down,” he said. 

The blowback in equity and credit markets could also be severe enough to prompt verbal intervention from the Fed, or even a shift towards the Fed buying more longer-term debt.

How the economic picture evolves as summer approaches could make the situation even thornier for the Fed.

Economists have already pencilled in a pick-up in consumer price increases this year as the economy reopens — a rise Fed officials say will be temporary. 

But the central bank’s endorsement of higher inflation, with its recent commitment to let inflation run hot to make up for past periods of undershooting its 2 per cent target, coupled with the enormity of the fiscal stimulus package recently signed into law have investors on edge.



“Markets have become incredibly concerned that the Fed will make a policy error in terms of higher inflation,” said Saira Malik, head of global equities at Nuveen. 

“The market can handle an increase in yields, but it needs to be orderly and driven by stronger growth and not going higher because the economy is overheating.”

Brian Rose, chief economist at UBS Global Wealth Management, said he was watching longer-term inflation expectations closely for any sign that inflationary pressures could become destabilising. 

Five-year break-even rates, which are derived from US inflation-protected government securities, now hover around 2.6 per cent, just shy of the highest level since 2008. 

The 10-year rate is slightly lower at 2.3 per cent. 

“If they are too successful and inflation expectations threaten to become de-anchored, then it becomes an issue and would make it a lot harder for the Fed to maintain very loose policy,” he said. 

On Wednesday, the so-called dot plot of policymakers’ interest rate projections implied that the central bank would keep interest rates close to zero until at least 2024, despite the sharp upgrade in its growth forecasts.

“There is nothing for now that tells us we are entering a new inflation regime that will . . . force the Fed to tighten,” said Diana Amoa, a fixed income portfolio manager at JPMorgan Asset Management. 

“That said, there is a lot more uncertainty around that.”

The Treasury Market Could Soon Get More Love

While markets are jittery about U.S. government bonds, foreign investors now have a big incentive to buy them with currency hedges

By Jon Sindreu


Like beauty, the value of a financial asset is in the eye of the beholder. 

Right now, Treasurys look much better from outside of the U.S.

On Wednesday, the U.S. placed $38 billion worth of 10-year debt at a closely watched Treasury auction. 

These are usually prosaic events, but record-low demand at the seven-year auction last month—particularly from foreign buyers—acted as a “sell” signal in a market already under pressure: 10-year yields recently rose above 1.6%, from 0.9% at the start of the year, denting stocks in the process.

In the end, investors put in a decent showing at the March auction, with a 2.38 bid-to-cover ratio and 20% of foreign bidders, in line with recent history. 

Yields have now retreated below 1.5%.

A key driver of the bond selloff has been expectations of a rebound in economic growth, combined with hints from the Federal Reserve that it isn’t bothered if good news leads investors to anticipate slightly higher interest rates. 

But Fed data also indicates that factors other than rate expectations are contributing to the increase in yields, prompting deeper worries.

Some fear, without justification, that the government will get punished for committing vast fiscal resources to fighting the pandemic. 

Others are concerned that disruptions in market plumbing have amplified the rout, as a result of regulations that impose costs on banks for acting as middlemen. 

When rates are expected to increase by a very uncertain amount, few investors want bonds. 

Currently, speculators are paying to borrow Treasurys and bet against them.

Wednesday’s auction is a reminder that, in the most liquid market in the world, buyers do turn up. 

Overseas demand for Treasurys, in particular, could strengthen.

Investors in the eurozone and Japan are getting negative returns of 0.3% and 0.1%, respectively, for buying their own ultrasafe 10-year government bonds. 

Even after the cost of currency hedging, the 1.5% available on a U.S. bond gives them a full percentage point more yield than their domestic bonds—the most in four years. 

This is a recent phenomenon: For most of 2020 it was U.S. investors who got paid extra for investing in the eurozone and, for a brief period, even in Japan.


In theory, this trade should already have been arbitraged away. 

One reason it hasn’t is that the bank balance-sheet constraints that have affected Treasury liquidity also have an impact on hedging costs. 

The other is that investors usually protect their bond purchases by rolling over three-month currency hedges. 

Since the cost of these hedges is tied to the yield on three-month bills, which haven’t sold off as much as 10-year bonds, foreign buyers gain whenever the Treasury yield curve steepens.

    The U.S. Treasury building in Washington. / PHOTO: AL DRAGO/BLOOMBERG NEWS


Once the dust settles on recent market gyrations, many overseas bond buyers will find an extra percentage point of yield too juicy to pass up. 

Unlike U.S.-based investors, which are still selling the mammoth $24 billion they put into Treasury funds in the first half of 2020, foreign investors may have room to grow their holdings, data from fund-flow tracker EPFR Global suggests.

U.S. investors are selling Treasurys bought because of Covid. 

Foreigners have head room to buy more.

The past year’s volatility has shown that even the Treasury market is vulnerable to hiccups, leading some investors to call it “broken.” 

Its role as a global haven, though, isn’t going away.