Bernanke: 4.3% Jobless Rate Needed to Get Inflation Back to Pre-Pandemic Level

Former Fed chief puts a number on the level of employment-related pain needed to hit price-rise target.




After the global financial crisis, U.S. inflation was tame, at around 2%. Then came the COVID-19 pandemic, when goods and labor shortages and federal stimulus spending combined to pump up prices to 7.5% in early 2022. Now, amid a host of economic uncertainties, the Federal Reserve is trying to restore the old inflation level by raising interest rates.

But restoring 2% inflation would entail higher unemployment. How high? According to a paper co-authored by former Fed Chair Ben Bernanke, an economist, 4.3% or higher.

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Getting to 2% inflation (as measured by the Fed’s favorite inflation metric, the personal consumption expenditure price index) “would require an unemployment rate above [4.3%] for a period of time,” the paper argued. As of April, the jobless rate was at a low 3.4%. 

Cooling the economy by throwing more people out of work, of course, involves a lot of pain. The last time the jobless rate was at 4.3% was in 2017, when the economy was doing well; unemployment fell to 3.5% right before the pandemic appeared, then spiked at 14.7% in April 2020. Next came the rapid recovery and burgeoning inflation, which only lately has dipped to the (still high, in the Fed’s eyes) 4.4%.

The paper, issued by the Brookings Institution, where Bernanke is now a senior fellow, argued that “labor-market balance should ultimately be the primary concern for central banks attempting to maintain price stability,” namely around the Fed’s target of 2%. The report was co-written with C. Fred Bergsten, a senior fellow at the Peterson Institute for International Economics.

The Bernanke-Bergsten paper delved into the intricacies of the Phillips curve, an economic model which posits that inflation and unemployment have an inverse relationship. Thus far, the Fed’s higher interest rates seem to have tempered inflation somewhat but have had little effect on joblessness.

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Canada’s CPPIB Returns 1.3% in Fiscal 2023

Canadian pension giant outperforms benchmark by 120 basis points to raise asset value to C$570 billion.

 




The Canada Pension Plan Investment Board returned 1.3% for the fiscal year that ended March 31, as the pension giant’s net assets rose to C$570 billion ($418.9 billion) from C$539 billion at the end of fiscal 2022. The fund reported five- and 10-year annualized net returns of 10.0% and 7.9%, respectively.

The 1.3% return outperformed the pension fund’s aggregated reference portfolio, which returned only 0.1%. CPPIB attributed the positive results to returns on investments in infrastructure, as well as certain U.S. dollar-denominated private equity and credit assets, which benefited from foreign exchange. It also credited external investment managers that use quantitative, equity and fixed-income trading strategies for making positive contributions. The performance, however, was partially offset by sharp declines in both equities and fixed income in major markets.

“Our strong long-term return of 10% over 10 years demonstrates that our active management strategy is on track,” CPPIB President and CEO John Graham said in a release. “Despite significant declines in global equity and fixed income markets during our fiscal year, our investment portfolio remained resilient, delivering stable returns while outperforming major indexes.”

The C$31 billion increase in net assets in 2022 was the result of C$23 billion in net transfers from the Canada Pension Plan and C$8 billion in net income. The larger-than-normal net cash flow was attributed to higher employment rates, an increased limit to 2022’s maximum pensionable earnings, an increase to additional CPP contribution inflows and a lump-sum inflow in the fourth quarter of 2022 due to forecasting adjustments made by the pension fund.

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As of the end of March, the asset allocation of the pension fund’s investment portfolio was 33% in private equities, 24% in public equities, 13% in credit, 12% in fixed income, 9% in infrastructure and 9% in real estate. Over the past five years, private equities has by far been the portfolio’s top-performing asset class returning 14.8%, followed by infrastructure and public equities, which returned 8.1% and 6.7%, respectively, during the same time period. Meanwhile the credit, real estate and fixed-income asset classes contributed annualized five-year returns of 3.4%, 2.9% and 0.8%, respectively.

CPPIB also reported that operating expenses rose by C$112 million during the year, which it attributed to an increase in personnel, continuous improvements to its technology and data infrastructure and the development of its investment science capabilities. Its operating expense ratio was 28.6 basis points, lower than the five-year average of 29.0 bps but up from 27.1 bps in fiscal 2022.

Management fees increased by C$165 million during the year, which the pension fund said was due to an increase in average assets managed by external fund managers. Meanwhile, performance fees decreased C$621 million thanks to fewer realization events in the private equity portfolio due to low transaction activity. Transaction-related expenses decreased C$151 million.

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CPPIB Returns 1.9% in Q3 of Fiscal 2023

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CPPIB Loses 4.2% in First Quarter of Fiscal Year 2023

 

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