Advertisement

Inflation will be 'brutal' in short run: Legendary investor Bruce Greenwald

45
Max Zahn with Andy Serwer
·4 min read

Federal Reserve officials this week reiterated their support for loose monetary policy and downplayed the threat of inflation, despite a recent report that showed in April the Consumer Price Index (CPI) increased at its fastest rate in more than a decade.

The stay-the-course approach from Fed officials defies criticism from some economists on the left and right over fears of a persistent spike in inflation that could derail the economic recovery.

Such critics rightly worry about continued inflation but misunderstand what's causing it, according to legendary investor and Columbia Business School Professor Bruce Greenwald.

In a new interview, Greenwald — whom The New York Times once called "a guru to Wall Street's gurus" — says inflation will continue to be "brutal" in the short run but it has nothing to do with monetary or even fiscal policy. Because Fed policies didn't cause the inflation spike, the central bank lacks the capacity to rein it in, he said.

ADVERTISEMENT

Instead, Greenwald says the Biden administration's support of a waiver of intellectual property rights for COVID-19 vaccines "scared the crap" out of companies that fear adverse government intervention in their day-to-day business. In turn, companies have raised prices to get ahead of other potential government actions, Greenwald said.

"I think in the short run, [inflation] is going to be brutal," Greenwald tells Yahoo Finance.

'Fiscal policy has never worked particularly well'

Speaking to Yahoo Finance's Brian Cheung, Federal Reserve Vice Chair Richard Clarida on Tuesday acknowledged the "risk case" of persistent inflation but said the Fed could "offset" such pressures if necessary.

Greenwald, a professor emeritus at Columbia Business School, sharply disagrees with that view. Loose monetary policy isn't the cause of inflation, since the Fed's approach began at the outset of the pandemic but inflation only took hold in recent months, Greenwald said.

"When we gave all this extraordinary monetary expansion, all the quantitative easing of buying bonds and so on, it had no detectable effect on the macro economy," he says.

"It strikes me as very odd to think monetary policy, at least, is going to have any effect on it going forward, which means that [if] inflation takes off, we're going to have a tough time controlling it with monetary policy," he adds. "Fiscal policy has never worked particularly well."

Since last March, the Fed has undertaken a loose policy of near-zero interest rates and the purchase of $120 billion in bonds each month. Economic observers have widely credited the monetary policy — along with trillions in fiscal stimulus — for softening the downturn caused by the pandemic.

But some economists, like former Treasury Secretary Larry Summers, warn that the hot economy is ripe for ongoing inflation. The Biden administration is closely monitoring inflationary pressures but so far has determined that the trend will be temporary, The New York Times reported last month.

The Bureau of Economic Analysis on Friday will release new inflation data with the Personal Consumption Expenditures (PCE) Index figures for April. That index rose 2.3% in March, after jumping just 1.5% in February.

NOVATO, CALIFORNIA - MAY 24: A butcher stocks a display case with packages of steaks at a Costco store on May 24, 2021 in Novato, California. According to a Morning Consult survey of 2,200 adult shoppers, one-third of those surveyed say that they are paying more for groceries, especially red meat and chicken. (Photo by Justin Sullivan/Getty Images)
According to a Morning Consult survey of 2,200 adult shoppers, one-third of those surveyed say that they are paying more for groceries, especially red meat and chicken. (Photo by Justin Sullivan/Getty Images) (Justin Sullivan via Getty Images)

Speaking to Yahoo Finance, Greenwald said the primary cause of recent inflation is the U.S. decision earlier this month to support a waiver of intellectual property protection on the COVID-19 vaccine. The Biden administration took the position in order to make available generic, affordable versions of the vaccine.

"I think the event was actually not monetary or fiscal policy," he says. "I think it was the vacating of the vaccine patents."

Amnesty International and Human Rights Watch called for the waiver last December, and the Biden administration began considering it in April, Reuters reported. Despite U.S. support for the waiver, negotiations at the World Trade Organization face significant opposition from some member countries and could take months to complete.

But the unusual U.S. intervention in intellectual property protection scared companies and drove a hike in prices, Greenwald said.

"I think businesses are going to look at that and say, 'Holy s***, these guys are not my friends, I got to protect myself,'" he says. "The easiest way to do that is to raise your prices, and when all the other local businesses raise their prices too, you don't even lose that much business."

"I think when the government scares these firms, they're just not interested in investing in the future," he says. "I think the government has scared the crap out of them, and they're going to protect themselves by using the pricing power that they have."

Read more:

Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, YouTube, and reddit.