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“The Fed, they have a really difficult job because right now they have very limited tools to deal with the economy,” said Dr. Tenpao Lee, an econmics professor at Niagara University in New York to TMS.
What’s fed tapering?
- When the pandemic hit, the United States Federal Reserve started to issue bonds to pump money into the economy to increase cash flow in the economy.
- Under normal circumstances, this would cause inflationary concerns, but because the economy was in such rough shape, putting money into the economy just meant that, for example, the millions who lost their jobs due to the pandemic could keep food on their tables during lockdowns.
- But, as the economy recovers and stabilizes, the Fed will eventually have to stop putting money into the economy to stimulate it.
- This is the point Fed Chairman Jerome Powell thinks we’re at. And, he has been indicating since August of this year that the Fed will likely begin the long process of fed tapering soon.
Why does Powell think this?
- Well, it isn’t as easy as pointing at a spot on a chart and deciding that if the economy reaches that point, then tapering will begin.
- “The Fed, they have a really difficult job because right now they have very limited tools to deal with the economy,” said Dr. Tenpao Lee, an econmics professor at Niagara University in New York to TMS.
- Dr. Lee explained that the Fed is essentially running out of tools in its toolbox to deal with rising inflation, but this is a major one it has left.
Will fed tapering solve inflation, though?
- According to Dr. Lee, the answer is no.
- “I think the tapering will not be effective, because the broken supply chain is the major factor,” he said.
- Dr. Lee argued that, since the current inflation is largely caused by an issue in supply rather than demand, fed tapering isn’t going to help ease inflationary pressures.
- “Right now, if you move something from Asia – China, Japan, Vietnam, Taiwan – to America, … it will be delayed at West Coast ports,” he explained. “And then even if you load your container to the port, there’s a delay because we don’t have enough truck drivers.”
- According to Dr. Lee, this impact on the supply of goods is the main driver behind the rising inflation seen worldwide.
What will fix it then?
- Dr. Lee said that the real thing that needs to be fixed is the supply chain, and the infrastructure bill in Congress right now is a good start.
- “I think for the government, physical policy right now has become more important,” said Dr. Lee, “because even as the government expands and increases infrastructure, as it helps productivity, that will help increase the capacity of the economy.”
- He said that the pandemic meant that the economy’s overall capacity in the US declined, partly because of significant dependence on China for production.
- To fix this, he said the US needs to move some production back home and shift to relying on other countries for some of it.
- This is especially true in the semiconductor industry, where Micrel Inc. Founder Ray Zinn estimates that between 60% and 70% of all the world’s semiconductors are produced in China, Taiwan and Korea.
- “Now, the one advantage that the US has is that they control the process technology, meaning the equipment that goes into manufacturing,” said Zinn in an interview with TMS. “Every five years that technology shifts and changes,” he said. “So, within five years, if the US so desires, they could literally switch the tables on this.”
- When it comes to dealing with the US economy, it seems that the Fed is pretty much out of tools, and in Dr. Lee’s view, fed tapering will be relatively ineffective.
- It is important to remember that fed tapering is a long process. The last time the government began tapering their investments, they removed US$5 billion from their investments every month for 10 months.
- At the same time, it will be important to see whether or not the US’ productivity is expanded through infrastructural projects that aim to increase the nation’s productivity, which, according to Lee, is why the president proposed the US$3.5 trillion infrastructure bill.