ANALYSIS – Federal Reserve Chairman Jerome Powell wants you to know everything is under control. Powell sounds calm and clinical when he talks about the frighteningly volatile economy. Despite price inflation rising at the fastest pace in 40 years and an economy limping sideways out of the ruin of the pandemic, he keeps repeating one important point: The Fed has all the tools it needs to meet these mounting challenges, particularly inflation.
Inflation, when left unchecked, can feed into itself and create an economically ruinous and socially destabilizing spiral. There is virtual unanimity among economists and politicians on the need to prevent this nightmare, and Powell has promised that the Fed can slay the inflation dragon. “No one should doubt that we will use our tools to guide inflation back to 2%,” he asserted during a speech in October, repeating the point this month as the Senate considered Powell’s all-but-assured reappointment as Fed chairman. But despite this confidence, year-over-year inflation is running at 7%, the highest level since the early 1980s.
Powell, a former private-equity executive and member of the Fed’s Board of Governors since 2012, is telling the truth — at least in a technical way. The Fed really does have all the tools it needs to stop inflation, but what Powell leaves unsaid is that using these tools could create a disaster. And what the Fed chair definitely won’t tell you is that this mess will be all the more catastrophic because of the Fed’s own policies over the past 12 years.
Since 2009, the Federal Reserve has injected extraordinary quantities of easy money into the Wall Street banking system in an attempt to boost the economy. And every time the Fed has tried to ease up on this firehose of cash and started to raise interest rates — as it will try to do again this year — investors dumped anything risky and markets fell. And every time, the Fed lost its nerve and reversed course. But now, inflation is forcing Powell’s hand and the Fed is being forced to tighten the money supply. The result will be a reordering of the economic system and carnage in markets for stocks, bonds, and corporate debt. As weary American workers already know, the chaos in financial markets will be quickly transmitted to the real economy when companies respond by cutting jobs and pulling back on investment.