Macroeconomic & Geopolitical

What Jerome Powell Really Wants for Christmas

December 2022 – 3 min read

Jerome Powell surely has a holiday wish list, especially facing a new year of slower growth, rising prices and inverted yield curves.

Maybe he hasn’t put it down in a written letter to Santa. Likely he hasn’t felt the need to justify how ‘nice’ he has been having avoided personal trading scandals. Certainly, he doesn’t believe a stocking full of magical gifts will deliver both full employment and stable prices.

But Jerome Powell surely has a holiday wish list, especially facing a new year of slower growth, rising prices and inverted yield curves. Few of his hopes will be fulfilled this Christmas, but the U.S. economy can avoid a sharp recession if enough of them arrive by this time next year. Indeed, a modest U.S. Federal Reserve (Fed) chair would hope as realistic as he could.

  1. Lower pay raises: If he only got one present, this would be it. It may seem obvious, but little else below will matter if future pay increases start to fuel a wage-price spiral. The risks of runaway increases still remain low, according to a recent IMF study, even as recent inflation expectation surveys are hardly reassuring. As long as inflation runs ahead of nominal wage growth, the cost-push pressures are less likely to trigger a vicious inflationary cycle. Still, the consequences of expectations breaking out are bad enough that it’s worth putting this at the top of the list.
  2. Steady home prices: The Fed’s own rate hikes have delivered a body blow to U.S. housing after two years of the fastest price increases on record. Existing home sales have fallen for most of the year and prices are starting to drop from month to month. The impact is minimal for current homeowners with fixed rate mortgages and conservative lending standards make a repeat of the sub-prime crisis unlikely. Still, the potential for painful spillovers is easy to imagine if the housing market crumbles badly.
  3. An end to China’s pandemic: Apart from the human cost from COVID and the recent social unrest around government policy, a quick relaxation of lockdown measures would be a gift indeed to the world’s economy. With the U.S. and Europe slowing, China is the last best hope to deliver accelerating growth next year. The country’s property crisis will remain a stiff headwind for consumer sentiment, but lifting quarantine measures would both boost global demand and reduce inflationary pressures from snarled supply chains.
  4. Solid banks: Something always breaks in a tightening cycle and so far, the most prominent victims—Sri Lanka, some U.K. pension managers and the crypto—have done little to rattle the system. Investors should take comfort that U.S. banks are so well capitalized going into this slump, but the risks from hidden leverage are difficult to track and, almost by definition, impossible to assess. If it takes a little magic from Santa to avoid a nasty surprise, Powell will surely not object.
  5. Peace in Ukraine: The Fed Chair wants “world peace” for Christmas like the rest of us, but even some early signs of negotiations between Kyiv and Moscow would restore order to oil and commodities markets. Even if Western sanctions on Russia remain in place indefinitely, a more contained conflict will boost confidence in both energy and food markets. That would be a welcome development for anyone worried about the U.S. consumer price basket.
  6. Less bickering: As the Fed approaches a policy turn early next year, differences will emerge among Powell’s colleagues on the Federal Open Market Committee (FOMC). Already, minutes from the rate-setters’ November meeting report an emerging rift between “some participants” who are squarely focused on continuing inflation risk and “other participants” who worry about the risks of “cumulative tightening.” Open debate is normally healthy, but rising dissent among rate-setters will magnify investor anxiety and confusion.
  7. Sensible politicians: This may be the biggest ask of all as a presidential election cycle kicks off. Republican candidates will blame the Fed for letting inflation spike, while Democrats will denounce the cruelty for rate hikes that throw so many people out of work. More worrying for Powell, however, will be the potential for another set of political showdowns over the debt limit as early as next spring. A government shutdown and a surge in bond volatility will make any recession deeper than it needs to be.

Is this too much to ask? Can the U.S. really avoid a recession? A peaceful Ukraine, a congenial FOMC and a constructive Congress may be too big an ask, but the first part of the list looks plausible. Even if China delays reopening, a cooler labor market, more stable house prices and rock solid banks should keep the coming downturn short and shallow. 

And it might even allow our hero to ask Santa for a new tie as well.


Christopher Smart, PhD, CFA

Chief Global Strategist & Head of the Barings Investment Institute

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