Placing blame for inflation and a likely recession

Who's to blame for our record inflation and likely recession?

Everyone blames President Biden, but the real cause is his predecessor Donald Trump for appointing Jerome Powell, who will likely be remembered as the worst Federal Reserve chair in modern times.

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Yes, Biden reappointed Powell, but neither president had any idea of the mistake of having a businessperson rather than a Ph.D. economist in the nation's second- most powerful position.

Powell's predecessors for the last 35 years, namely Greenspan, Bernanke and Yellen, all had doctorates in economics.

Powell, with degrees in politics and law, got his economics "Ph.D." from the Carlyle Group, one of the Beltway's most politically influential revolving-door firms.

Having studied the Fed for over 50 years and taught my students at Wharton about it for over 40 of those years, I believe the Senate should not confirm the appointment of any future Fed chairs without a doctorate in economics.

Every economist studies Milton Friedman, who famously concluded that "inflation is always and everywhere a monetary phenomenon."

This means inflation follows a rapid increase in the money supply but after a long and variable lag, often 12 to 24 months or longer. Another way of saying this is that inflation results from "too much money chasing too few goods." 

This is exactly what happened starting in March 2020 when the COVID-19 pandemic resulted in a record increase in the money supply from monetary and fiscal channels. Unanticipated disruptions in the supply chain reduced the amount of goods, causing a double- whammy impact.

The lagged inflation did not hit the economic fan until the second half of 2021, but Powell ignored it by notoriously saying the high inflation was "transitory."

Was this mistake, arguably one of the worst ever by a Fed chair, the result of his failure to listen to the more than 400 Ph.D. economists at the Fed? Or perhaps something else?

The Fed's rate-deciding Federal Open Market Committee is dominated by the "my way or the highway" Powell, who recently proclaimed, "I control those messages and that's my job." 

In my opinion, Powell obligingly kept rates at record lows last year to keep his job. After many public disagreements with Trump, the politically trained Powell knew the best way to get reappointed by Biden was to keep rates low to continue stimulating the stock market and economy. Despite progressive Democrats' push for an alternate candidate, Powell's political playbook worked, and he was reappointed last November.

It is my further opinion that a Fed chair, like most politicians, will do almost anything to maintain their personal power, even at the expense of the dollar's purchasing power.

Powell compounded his transitory mistake by signaling specific future rate increases instead of the traditional Fed approach of keeping all rate options open until the last minute. For example, after the May meeting he all but guaranteed a 0.5% increase for the June and July FOMC meetings and specifically rejected a 0.75% increase. However, he shocked worldwide markets at the last minute by reversing and announcing the highest (0.75%) increase in 28 years.

Making matters worse, he leaked this super-sensitive information the day before the FOMC meeting to The Wall Street Journal. Such Fed rate leaks to the press are unheard-of, because it only takes one person in the chain of editors, typesetters, proofers, etc., to improperly use this advance inside information to make millions in the market.

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My repeated Freedom of Information Act requests on what a friendly former Fed governor shockingly dubbed an "authorized leak," a classic oxymoron, were rejected. The Senate and SEC must investigate Powell's leak to determine whether it resulted in any illicit profits.

These and other mistakes by Powell have caused the Fed to lose much of its inflation-fighting credibility among central banks and the American public, facing the highest inflation in 40 years, a collapsing housing market and likely recession.

The Nobel laureate Robert Solow said, "We have inflation because we expect inflation, and we expect inflation because we've had it." The vicious circle of inflation and expectations will only get worse with a Fed without credibility and a chair with on-the-job economic training.

With few options left to save his tarnished legacy for doing nothing last year, Powell is throwing a Hail Mary economic pass by raising rates at a record pace starting in March. This caused the money supply to shrink for the first time in decades, suggesting a recession is all but certain next year.

Unlike past recessions caused by demand or supply shocks outside the Fed's control, this should be remembered as the "Jay Powell Recession," since it is the only one I can recall traced back to the actions and inactions of a single person.