Elizabeth Warren’s bill almost gives Joe Biden some cover … almost.

Inflation

Inflation, not climate change, will be at the top of the taxpayer’s electoral cheat sheet come the mid-term elections in November.  I expect Democrats like U.S. Senator Elizabeth Warren of Massachusetts will lead the way with an argument that price gouging is at the heart of the high rate of inflation Americans are seeing.

Last month, Mrs Warren, along with other Senate colleagues, introduced the Price Gouging Prevention Act of 2022 which is intended to prohibit price gouging during all periods of market disruptions.  The Federal Trade Commission will be the lead agency on its enforcement.  

Co-sponsor Senator Tammy Baldwin, Democrat of Wisconsin, tied inflation to the bill by saying, “This legislation will shine a light on price hikes and help prevent big corporations from exploiting a period of inflation to gouge consumers with higher costs.” 

The bill appears to be an attempt at making Congress appear as a significant player in fighting inflation by using red herring buzz words like “price gouging” and “inflation.”  The bill at the same time distances itself from the narrative spin by not even defining the word “inflation.

Instead, the bill throws out into the universe a concept it labels, “exceptional market shock” which it defines as, “any change or imminently threatened (as determined under guidance issued by the Commission) change in the market for a good or service resulting from a natural disaster, failure or shortage of electric power or other source of energy, strike, civil disorder, war, military action, national or local emergency, public health emergency, or any other cause of an atypical disruption in such market.”

The text book definition of inflation is an increase in the average level of prices of goods and services.  But what is driving this increase in average price levels?  In this case it is an expectation of disruption in the money markets.

I believe that goods, services, and money markets are responding to the narrative of inflation and particularly in the money markets the expectation of rate increases is being passed from short term lenders to wholesalers to retailers and finally to end-user customers.

As the narrative of short-term rate increases pervades the markets, businesses still have short term consumer demand to meet so they borrow at the higher rates.  In the immediate term these borrowing costs get passed down to the end-user consumer in the form of higher prices.

To Mrs Warren’s credit, she is two-thirds of the way in meeting her thinly-veiled objective which is to provide Joe Biden and the Democrats with as much cover as possible going into the mid-terms.  The objective here is to separate the Democrats from the inflation problem by providing a legislative initiative while reminding the electorate that the management of the money supply, the real cause of inflation, is in the Federal Reserve’s lane.

The public will push back and say that Mr Biden re-appointed Jerome Powell as chairman of the Federal Reserve System’s Board of Governors so why should Biden be pulled off the hook unscathed?  Mrs Warren could argue that she tried to warn Biden and the rest of the Senate that Mr Powell was a “dangerous man” and now we are reaping what we sow.

Like I said, Mrs Warren is two-thirds of the way there.  Had she expressly defined inflation; included money markets in the definition; and firmly expressed that this bill is about monitoring price levels, the bill, at least narrative wise, would have offered more punch. 

Alton Drew

12 June 2022

Elizabeth Warren’s “dangerous man” moment should not impact traders, but traders should determine if she has the votes…

Assuming President Joe Biden nominates Jerome Powell as chairman of the Board of Governors of the Federal Reserve System, Mr Powell will need a simple majority in the U.S. Senate to support his confirmation.  In 2018, Mr Powell was confirmed via a Senate vote of 84-13 which meant that a number of Democrats also voted to support him. Among those dissenting was Elizabeth Warren, Democrat of Massachusetts, who yesterday made it clear that she would not support his nomination in 2022.

Yesterday, during a Senate banking committee hearing, Mrs Warren expressed her belief that Mr Powell is making it too easy for large banks to take on big risks.  “The Fed chair should be like a sentry, standing at the gates, making certain that banks are not loading up on risks that could take down the entire economy,” Warren told Bloomberg News.  Mrs Warren went as far yesterday to mention Archegos Capital, the family office who exposed a number of banks to losses due to bad bets made by the family office.

That Mrs Warren would vehemently express her intent not to support Mr Powell (referencing him as a “dangerous man”) tells me that she has already received signals from the White House that Mr Powell will be nominated by President Biden.  The Secretary of the Treasury, Janet Yellen, has expressed her support for Mr Powell and it is likely that he will garner a large majority of Republican support and the support of a sufficient number of Democrats.  I believe this support will be provided in part to push back against the progressivism in the Congress, particularly in the House of Representatives.

Mrs Warren has not made any compelling arguments regarding the market forces that impact foreign exchange. There has been no discussion from her camp regarding relative income changes, product availability, relative interest rates, or speculation between the U.S. and other countries; market force observations that are of greater importance to traders and central banks.  Such arguments, if substantiated, would have probably swayed support to her position among more senators (maybe), but we will never know.

Mr Biden’s rare smart play will be to nominate Mr Powell thereby providing the interbank market with increased certainty as to monetary policy.  Regarding Mrs Warren, this may be just another “meh” moment.

Alton Drew

29 September 2021