February 24, 2022
🚨 Situational awareness: Russia's invasion of Ukraine will drive financial news for the foreseeable future. For a longtime economics writer like your newsletter-er, this creates a very particular kind of discomfort.
- Rarely does an econ writer feel more useless than when war and peace are at issue. In these moments that feel like a potential fulcrum of history, it's not the worst thing to take a beat and then focus on the economic implications when things become clearer.
There will be plenty of time in the hours and days ahead to unpack how events in Eastern Europe will ripple through the world economy. But for now, let's look at some Fed vote-counting, checking account balances, and other topics, all in 1,210 words, a 5-minute read.
1 big thing: Jerome Powell's math problem
When the Federal Reserve chair speaks, the world listens, assuming his policy preferences will be enacted.
- But through an unusual constellation of events, Jerome Powell faces extremely tight math in attaining a majority of the Fed's policy-setting committee for his preferred actions.
Why it matters: At a time of high inflation and geopolitical uncertainty, Powell's job will include managing tricky internal politics that tilt Fed policy in a more hawkish direction than he might prefer.
The situation results from many factors colliding: The Biden administration's sluggishness making Fed nominations, Senate Republicans' aggressive tactics to block one of the nominees, random chance around which regional Fed banks have a policy vote this year, and even the trading scandal involving Fed officials.
By the numbers: The monetary policy-setting Federal Open Market Committee currently has nine voting members, due to vacant Fed governor positions awaiting Senate confirmation.
- Six of the nine appear to be more hawkish — favoring higher interest rates faster — than the leadership troika of Powell, governor Lael Brainard and New York Fed chief John Williams.
Counting the votes: Four regional bank presidents with votes this year have expressed views that are more hawkish than core Fed leadership: Jim Bullard of St. Louis, Esther George of Kansas City, Loretta Mester of Cleveland, and Patrick Harker of Philadelphia.
- Harker, as it happens, only has a vote this year because the Boston Fed presidency is currently unoccupied after the trading scandal prompted an early retirement.
- Then there are two Trump-appointed governors who appear to be on Powell's hawkish flank: Christopher Waller, a former close associate of Bullard, and Michelle Bowman, a bank regulator who this week called for "prompt and decisive action" to reduce inflation.
The math: If three of those six officials were to dissent, it would match the highest number in recent memory. If four dissent, it would be the most since 1983 and raise questions about Powell's level of control.
- Bullard, George and Mester have all dissented in the past.
- If five of the six disagree strongly enough with Powell's policy direction to vote against him, it would amount to a governance crisis at the world's most powerful central bank.
Yes but: Powell has an adept political touch and has thus far been skilled at keeping his policy committee steered in the same direction, disagreements notwithstanding.
- No Fed governor has dissented since 2005. In recent decades they've acted more as part of the chair's inner-circle.
- The math should get simpler for Powell when one or more of Biden's nominees is confirmed, and when economist Susan Collins takes over as president of the Boston Fed on July 1, replacing Harker as a voter.
Late-breaking caveat: The follow-the-leader instinct is stronger at moments of crisis, so the Russian invasion of Ukraine could a make it easier for Powell to keep his colleagues on his side.
The bottom line: More so than usual, counting votes at the Fed will matter for the near-term path of policy.
2. Flashback: Powell vs. Bernanke
Fed governors don't have to formally dissent to sway policy. To see how, turn to former chair Ben Bernanke's memoir, "The Courage to Act."
- He tells of how, in 2013, three governors, nicknamed the "three amigos," were uncomfortable with the Fed's open-ended quantitative easing policies and pushed behind-the-scenes to end them sooner rather than later.
- Bernanke couldn't afford to lose their support, and so he gave them the opportunity to comment on his planned press conference remarks. "My position as chairman is untenable if I don't have the support of the board," Bernanke recalled telling them.
In his efforts to keep everybody happy, Bernanke signaled in May 2013 that the Fed would wind down its bond purchases, triggering a market freak-out known as the "taper tantrum."
Those governors: Elizabeth Duke, who occupied the regulatory role now held by Bowman; Jeremy Stein; and a young Jerome Powell.
3. Americans are still flush, but less so
The pandemic — and particularly the government response to it — fueled a sharp rise in Americans' levels of savings.
- But as time passes, that effect is fading, and typical checking account balances are falling fast, according to new data from the JPMorgan Chase Institute.
Why it matters: The pile of savings Americans built up during the last two years has improved personal finances and propped up spending — but it's rapidly unwinding.
By the numbers: Among 7.5 million Chase customers, the median checking account balance for lower-income customers (those making below $26,000) was 65% higher at the end of 2021 than it was in 2019. It was up 35% among those making over $65,000.
- Yes but: by contrast, low-income families' balances were 120% above 2019 levels after $1,400 stimulus checks arrived last March. The data suggests that low-income Americans rapidly spent down their stimulus checks, though have continued to hold more of a cash cushion than they had pre-pandemic.
The bottom line: The checks got the job done of enabling working Americans' purchasing power, whatever role they may have played in fueling inflation.
4. How talent hoarding makes companies worse
Suppose you're a middle manager in a large organization, and you discover that one of your employees is exceptionally talented. What do you do next?
- It's probably in your best interest to keep them on your team as long as possible, as they will help you succeed. But the best thing for the company is to help them get promoted, potentially to a new team.
Why it matters: New research shows just how big a problem this "talent hoarding" can be — and thus the urgency for organizations find ways to incentivize managers to promote the best people, even if it means losing them.
This contradiction is quantified in a new paper by Ingrid Haegele, a doctoral candidate at the University of California-Berkeley.
By the numbers: Haegele used personnel records from an unnamed large manufacturing firm in Germany to show that during periods when managers were moving into a new position on a different team and had no reason to hoard workers, their employees' applications for promotion rose 123%.
- The effects are bigger than can be justified by phenomena like workers having a personal loyalty toward their manager, according to statistical tests.
- It also disproportionately disadvantages women, she found.
In a footnote, Haegele recounts a dramatic example of talent hoarding. Katalin Karikó, who did key research leading to mRNA vaccines, tried to move to a better-paid position at a different university and reportedly had her pathway spiked by her adviser.
5. Work from home is wearing your house out
More time at home means more wear and tear on your house. As a result, people working from home more is good news for the home improvement business.
- Refrigerators opened and closed throughout the day. Toilets flushed more frequently. More foot traffic on floors and carpets. These all mean homes need repairs and equipment replacements more often.
What they're saying: A trend that "remained favorable," Lowe's CEO Marvin Ellison said on an earnings call this week, was that "with the extension of remote work ... some employees are expecting a permanent step-up in repair and maintenance cycle."
- Another favorable trend he cited: baby boomers' "increasing preference to aging-in-place," meaning staying in a house — which will need repairs — rather than moving into retirement communities.
The bottom line: "We're encouraged that the macro environment for home improvement remains very supportive," Ellison said.
Things fall apart, the center cannot hold, but we'll be coming to you next week anyway.