Federal Reserve chairman Jerome Powell has taken a turn to the dark side.
After years of pleasing everyone on Wall Street and in Washington, D.C. with ultra-loose monetary policy, Powell has, for now, decided to recast himself as the villain. He now seems intent on crashing markets, killing jobs, and driving the economy into a deep recession in the name of fighting the inflation he helped unleash.
“Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy. Without price stability, the economy does not work for anyone,” Powell said in remarks last week following the Fed’s triple-barrel rate hike.
He added, “The longer the current bout of high inflation continues the greater the chance that expectations of higher inflation will become entrenched.”
Powell also suggested that getting out in front of inflation is more important than trying to engineer a soft landing for the economy. Effectively, he has given up on dodging a recession.
The only question is how severe it will be. Since Fed policy decisions typically take at least three months to work their way through the economy, things could get significantly worse heading into the end of the year.
This is the same Fed chairman who just a year ago was insisting inflation was transitory and abjectly refused to do anything to curb it. Earlier this year, he insisted the economy was strong and wasn’t in danger of tipping into recession (which it has according to the standard textbook definition of recession).
Almost nobody expected the Fed to keep hiking rates this quickly or overshoot the 3% level, and stocks, bonds, currencies, and real estate are now all flashing warning signs of a financial crisis.
Central banks supposedly exist to help stabilize the economy and dampen the effects of booms and busts. But the Fed under Jay Powell is amplifying the boom-and-bust cycle by first pumping the up economy with excess liquidity, then hastily trying to drain it out.
Wharton professor Jeremy Siegel blasted Fed policymakers during a CNBC interview last Friday:
The last two years [are] one of the biggest policy mistakes in the 110-year history of the Fed, by staying so easy when everything was booming.
When we have all commodities going up at rapid rates, Chairman Powell and the Fed said: 'We don't see any inflation. We see no need to raise interest rates in 2022.'
Now when all those very same commodities and asset prices are going down, he says: 'Stubborn inflation requires the Fed to stay tight all the way through 2023.' It makes absolutely no sense to me whatsoever.
Why do Fed policies seemingly make no sense? Do Fed economists know something the rest of us don't?
Perhaps they are worried about a global energy crisis and food shortage and are desperately trying to curtail demand for commodities.
It's unlikely, though, that central bankers are exhibiting any special economic foresight. They have consistently been wrong over the years when it comes to anticipating major economic events such as recessions, inflation outbreaks, and financial crises.
What is clear is that Jerome Powell and company were tired of being disrespected by markets.
The Fed felt it needed to restore its credibility on inflation and show investors that they can’t count on the printing press to lift equity markets every time they dip.
The Fed was also tired of being taken for granted by deficit-spending politicians. Congress and the Biden administration have assumed that artificially low borrowing costs and Fed bond-buying sprees would let them off the hook in perpetuity for pursuing fiscally reckless policies.
The Fed is ultimately empowered by Congress. And Powell may soon discover that further rate hikes are politically untenable.
As the Fed-fueled boom turns into a Fed-induced bust, central bankers will find themselves behind the curve on monetary policy, as usual. And just like so many times before, they will abruptly reverse course and start the boom-bust cycle all over again.