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Like many consumers, your humble correspondent wishes that Washington would shoot for an inflation rate of zero rather than the Federal Reserve’s preferred target of 2%. The dollars we earn should retain their value rather than gradually lose it. With inflation down significantly from the 2022 highs but still above 2%, the last thing our currency appears to need is the dramatic slashing of interest rates demanded by President Donald Trump. As for his criticism of Federal Reserve Chairman Jerome Powell, that’s harder to rebut. Many pillars of the financial community have rushed to defend Mr. Powell, despite his manifest failure to maintain price stability, based on a
belief in the importance of the independence of the central bank. The difficulty in making this argument arises not just because a large segment of the public distrusts unelected experts exercising enormous government power or because the Federal Reserve’s fingerprints are all over the great financial calamities that have occurred since its 1913 creation. The main problem is that Jerome Powell’s monetary failures all spring precisely from the fact that he was not acting independently. In the spring of 2020 various governors, numerous members of Congress and even for a time President Trump accepted the ill-considered notion that the appropriate response to Covid was to shut down the world’s greatest economy. In response, the Fed chairman did not act as an independent counterweight to the political appetites of the
day. He simply accepted the judgment of the political class and facilitated their scheme to simulate the benefits of a vibrant economy while keeping much of it closed. Mr. Powell promptly led the Fed in creating $3 trillion in the space of just a few months. If instead he had made it clear to the pols that they would have to accept the consequences of their decisions to shutter society, would much of the Covid panic have been avoided? Granted not everyone was a lockdown skeptic right from the start. It was not immediately clear to many people why a government disease doctor could not be trusted to issue societywide prescriptions with massive side effects he hadn’t bothered to study. Therefore many people would likely give the Fed chairman, who is not a doctor, the benefit of the doubt for accepting the establishment consensus in the spring of 2020 and running the electronic printing presses virtually non-stop. But what’s his excuse for what happened after that? Even after many of the lockdowns had ended and the economy began roaring back to life in the midsummer of 2020, the Fed’s balance sheet underwent only a momentary slight reduction before resuming the era of supercharged money creation. Through the end of the first Trump term and
then into the Biden era, as the economy grew and politicians kept enacting one unnecessary rescue package after another, the Powell Fed kept singing an accompanying tune, with another roughly $2 trillion binge of money creation that did not end until the spring of 2022. Coincidentally, this was just before the Senate confirmed him to another term as Fed chairman and not long before inflation peaked above 9%. After a couple of years of tightening, the Powell Fed then started cutting rates again early last fall and into December but then paused. The inflation beast had still not been slain, and economists began debating whether Trump tariffs would make the task harder.
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