Powell’s Out of Options


Philip Mahoney , Opinions Writer

If you felt stuck in a malaise and pessimistic about the economy, Chair of the Federal Reserve, Jerome Powell, has come up with a way to surpass your already low expectations for him. Since the COVID pandemic, bad monetary and fiscal policy have stemmed from a Congress and the Federal Reserve System (Fed) that have been too accommodating with a new administration spending en masse. 


Having been touched up with interest rates that were kept too low and a surfeit of money printing from before, it is quite clear why we are on track for one of the worst recessions in American history. Quantitative easing (the Fed’s printing of new money to buy treasuries which increase the monetary base) went on for far too long with the Fed refusing to begin quantitative tightening until Q2 of 2022. Now, Mr. Powell slams on the brakes by concluding asset purchases, which bears the potential to both ebb inflation and destabilize markets to the point of crisis.


Frankly, alarm bells should have sounded long ago. Bond markets have always served as a great barometer for the economy as a whole, and when the inversion of the yield curve began in 2022 (from buyers demanding a greater return on short term lending) it should have turned heads.


A year after an inversion tends to be followed by recession precisely where we are now. This inflationary cycle was likely the result of artificially low interest rates that were designed to encourage economic activity and the immediate release of pent-up demand, coupled with a battered and feeble supply chain. 2021 also saw the introduction of a new factor that many did not believe would be problematic whatsoever: Joe Biden.


Even before President Biden had been elected, it appeared that the worst effects of the 2020 recession had subsided, with inflation running just slightly ahead of where it was before, despite the repeated introduction of stimulus checks by former President Trump. Mr. Powell should have taken this as the cue to hit the brakes in the first quarter of 2021, and the new-to-be President should have sat back and allowed the market to adjust itself to the post-pandemic conclusion. 


Instead, the Fed continued to print, buy, and print even more, with stimulus continuing even when the economy had already moved toward recovery. Concurrently, with calls to adhere to progressivism and a desire to be seen as “effective,” Mr. Biden pushed a monolith of Keynesian naivety with the American Rescue Plan passed in March 2021. With the market anticipating passage of the bill, inflation took off like a rocket-ship with its afterburners powered by an additional spending package in the form of the Bipartisan Infrastructure Bill, passed in August 2021.  


It is also worth noting that a majority of this inflation is energy driven, with most investment firms, political organizations, and the White House supporting a near immediate transition to green energy. Fulfilling a campaign promise to “phase out the fossil fuel industry,” Mr. Biden has made it quite difficult for the expanded production of oil and natural gas. As a result of this new shift, oil production averaged about 11.8 million barrels per day in 2022, far below the record 13.1 million barrels in the beginning of 2020.


Now with higher energy costs, further fueled by the war in Ukraine, other prices are rising correspondingly especially in the food industry, which relies on fossil fuels for trucks, fishing boats, and tractors. With President Biden and Mr. Powell seeming to claim inflation was “transitory,” it was apparent that despite the price increase and warning signs of economic decline, their minds were set elsewhere. Inflation, as of writing, currently sits at an annualized rate of 8.3%, with the dollar having lost 12% of its purchasing power since the 2020 election.


Now, as the Fed attempts to wrestle inflation under control, the President has embarked on a quest to spend as much as he can in order to sway the hearts and minds of his base for November. He has secured an increase of spending for green energy in his Inflation Reduction Act and has now forgiven up to $10,000 in student loan debt. This additional money runs contrary to the new intentions of Mr. Powell, whose plan of tightening has now been slightly thwarted by these actions.


A decline in GDP growth for two consecutive quarters had always defined a recession, until Mr. Biden conveniently changed it ahead of the second quarter’s report this year. With the data claiming recession, the Fed and the administration have attempted to argue that there cannot be a recession with the current unemployment rate at its near record low. While technically a positive economic statement, this metric has been kept artificially low because millions of people who should be employed in the labor market have opted to remain out, thus resulting in a low labor participation rate. 


Another one of Mr. Powell’s follies is the idea that this inflation is being driven solely by his monetary policy, which really has only exacerbated the already existing energy crisis that contributes to the “global inflation” that many pundits and members of the administration have used to deflect blame. He has no influence over the policy of the President, and it seems far from likely Mr. Biden will shift to a less “green” approach even if a Republican Congress is seated next January. Taming energy prices is a crucial step for the administration, especially ahead of winter where prices are expected to rise exponentially.


Mr. Powell’s house of cards appears to now be tumbling all around him, as he is left with no viable options. Many projections consider a third quarter of negative GDP growth as a near certainty, which has not occurred since the Great Recession of 2008. If a serious recession emerges, as the market appears to predict, the Fed could have to cut rates instead of raising them to stimulate growth which will increase inflation as Mr. Powell has shown no ability to cope with recession by easing credit. 


This scenario seems most likely, and is what is currently expected by investors at the present time. The simple fact of the matter is that the Fed must choose between what they interpret as the lesser of two evils. Taming inflation requires pushing the economy toward a serious recession, akin to 2008, and yet any attempts to fix the current recession will result in further inflation. Had reckless spending not ensued last year, the situation would have been significantly better, yet the future of the economy currently rests in the hands of a man who has seemingly bungled it so far.