Powell’s Inflation Worsens

The latest data released by the Bureau of Labor Statistics shows that in January the annual inflation rate rose to 3%. Recall the Federal Reserve’s target, set when inflation was more than 9% in June 2022, was 2%. We never reached that target, yet Fed Chair Jerome Powell cut interest rates three times in the Fall of last year.

Most economists view these rate cuts as a mistake. This follows a series of mistakes that Powell’s Fed has made. Although poor monetary policy decisions are not the sole cause of the extraordinarily high inflation, the Fed could have acted differently in the last year and a half to bring inflation down.

The high inflation that the U.S. has experienced since January 2021 is due to three things. One is the Biden administration’s policy to reduce the supply of energy by restricting the production of oil and natural gas. Since energy prices directly account for 7% of the Consumer Price Index, and indirectly almost 30%, the resulting high energy prices added significantly to inflation.

Second is the massive increases in federal government spending. In 2019, the government spent about $4.5 trillion. By 2024 the number was more than $6.5 trillion. This added huge amounts of excess demand, especially since at least 30% of the spending came from borrowed funds.

The third reason is terrible monetary policy set by Powell’s Fed. In January 2021 the CPI began to rise from the 1.4% rate in December 2024. By June 2022 the annual CPI increased to a whopping 9.1%. During that time, the Fed did absolutely nothing. Monetary policy during that period allowed large increases in the money supply, mostly through the Fed’s bond buying program.

At the same time, the Fed kept interest rates near zero. There was no sound economic reason for that policy. In 2021 unemployment was rapidly falling and the economy was growing at a 6% rate. Low interest rates and rapid growth in the money supply are actions taken when unemployment is rising and when the economy is not growing. Clearly not the case in 2021.

Even with the high energy prices and the huge government spending, the Fed could have taken action to reduce inflation, by raising interest rates and slowing the growth of the money supply. Yet Powell insisted the inflation was transitory and would fall by itself without any tightening by the Fed. That was Powell’s first major mistake that led to high inflation.

In June 2022 Powell finally realized he was wrong. The Fed began to aggressively raise interest rates. By July 2023 the annual inflation rate had fallen to 3.2%. Powell’s target was 2%, meaning another two or three interest rate increases were needed. Yet Powell’s Fed decided to stop raising interest rates.

Halting the interest rate increases was Powell’s second major mistake. Inflation hovered at the 3% rate for most of the next year.

Finally, in September 2024, the annual inflation rate fell to 2.4%, which was near the 2% target. But then Powell’s Fed made its third major mistake. Had the Fed done nothing, inflation would likely have fallen close to the 2% level by year end.

In September, the unemployment rate was 4.1%. Most economists consider that a full employment level. Gross domestic product (GDP) was growing at a 3% rate, which is considered healthy. Yet Powell’s Fed reduced interest rates in September, again in November and again in December.

There was no sound economic reason for those cuts.

The annual inflation rate rose to 2.6% in October. In November inflation rose to 2.7%, yet Powell cut interest rates again. In December inflation rose to 2.9%, yet Powell cut interest rates again. In January the annual inflation rate rose to 3%.

Even with the high energy prices and the excess government spending Powel’s Fed made three major mistakes that have left the country with 3% annual inflation.

Let’s call it Powell’s inflation.

The Trump administration is taking action to increase the supply of energy, which will reduce Powell’s inflation, although that will take some time.

The Trump administration is taking drastic action to reduce government spending to help bring Powell’s inflation down. (Surprisingly, there is some political resistance to that.)

Unfortunately, the Trump administration must wait until next February to replace Powell as Fed chair. That is the last action needed to reduce Powell’s inflation.

Agree/Disagree with the author(s)? Let them know in the comments below and be heard by 10’s of thousands of CDN readers each day!