Powell’s Blunder(s)

By Shlomo Maital

  Jerome Powell (Financial Times)

Jerome Powell is Chairman of the Federal Reserve Board of Governors.  He was elevated to chairman by President Donald Trump, succeeding Janet Yellen in the position. Yellen is now Secretary of the Treasury. Powell was renominated as chair by President Joe Biden on November 22, 2021.  That was a huge mistake.

   Powell expanded the US money supply, in the wake of the COVID pandemic, and lowered interest rates to zero.  As inflation began to rise, he insisted that the inflation was temporary. It was not. He was too late in raising rates.  Now, he is raising them rapidly and excessively – covering his behind, in the wake of his misread of the data.  The result is causing havoc, as other Central Banks follow suit (including in my country, Israel.  The US dollar is rising, other currencies are falling, raising their import prices and ‘exporting’ US inflation.   Powell’s excessive tightening is rattling capital markets, and the Dow Jones is now officially in a ‘bear’ market (20% decline). 

     What is causing US inflation?  Here is an alternate theory to that of Powell. 

     People cut spending radically during the COVID lockdown – virtually, two to three years.  Now they emerge and are playing catchup.  They have money, while wages too are rising.  There is inflation illusion – inflation-adjusted wages are not up that much, but they appear to be higher. 

     At the same time, businesses, that lost heavily during the pandemic, 2020-22, are playing catchup,  jacking up prices, because – they can, as people are willing to pay those prices, because, they have money in their pockets.

     So if this is the cause of inflation, what impact will higher interest rates have? It will kill the housing market, hurt employment.  And perhaps bring recession. 

     What is the alternative?  Recognize that some inflation is not so terrible, while higher unemployment and recession is far far worse.  Moderate the interest rate hikes.  Tax excessive corporate profits (noticed lately the billions the banks and energy companies are raking in,  with low taxes?).  

      Don’t believe me.  Who am I anyway?  Believe Jeremy Siegel,  Professor of Finance at the Wharton School, Univ. of Pennsylvania.  And many other distinguished economists, who believe Powell’s current policy is disastrous, covering an equally disastrous mistake, which he will not admit to.

      Biden could have found a far wiser person instead of reappointing a Trump appointee.  Recall how Ben Bernanke rescued the US during the 2008 financial crash.  Powell is not in Bernanke’s league.  And alas, the people of the United States are paying the price.