The Fed is Asleep at the Wheel

Not since the late 1970s has the Fed blundered to such an overwhelming extent. Jerome Powell and company are completely asleep at the wheel. Inflation is out of control – there is not other way to state it. Although CPI rose about 7% last year, the reality is that actual inflation – the inflation that affects people in their everyday lives – housing, food, gasoline – is at insane levels. The government’s solution is to try to pump another $2 trillion into the economy. This will only exacerbate and intensify the already dangerous inflation situation we face.

The Fed should have begun raising interest rates at least a year ago. We can forgive the Fed back in the late 1970s because they had not faced a similar situation in the past, so at least it was the first time for them. Powell and company do not have that excuse, or any good excuse.

When Paul Volker came into the Fed under the Reagan Administration, he was forced to aggressively raise interest rates, and to keep them elevated (as high as 19%) for a sustained period of time, which led to the 1981 – 82 deep U.S. recession that cost millions of jobs. People lost their homes. The impact was the greatest on the lowest income earners.

Because the Fed has allowed inflation to run out of control for far too long, the only way to get it back under control is to take aggressive action, including cutting cash injections into the economy through bond purchases, which they have already begun, and jumping interest rates. The proposed slow, steady rate raising cycle they are currently planning will not be effective. Inflation is now like a highly contagious virus (like Omicron), that has already spread, infecting the entire global economy. Half measures will not be enough to stop the spread. Only through aggressive rate raising over a sustained period of time will the Fed have any chance of stopping inflation from rising to a point where it crushes the economy. The longer they wait, the more aggressive they will need to be to stop it, and the more damage their rate increases will do to the economy, and to you and me.

The U.S. economy is like the Titanic; not that it is doomed to sink, but it is like a big ship with a small rudder – if you want to turn it, you have to start turning early. Like the Titanic’s crew, which waited far too long to start turning once they saw the iceberg, the Fed has waited far too long to start raising interest rates to turn the U.S. economy away from recession. Make no mistake, we are headed straight for a recession. The only question now is; how deep will it be and how long will it last?

The recession that followed the massive rate increases that Volker put in place lasted about 2 years, and was once of the deepest in U.S. history. Given the extreme bubbles that we currently see in virtually every asset class – stocks, bonds, precious metals, real estate, commodities, art, collectibles – you name it, and the size of the economy and global integration we have experienced as compared to the early 1980s, I think it is safe to say that the coming recession will be one of the worst ever experienced in the history of the world.

Had the Fed begun raising rates a year ago, I think it would have been possible to have a soft landing, meaning a relatively manageable and mild recession. I don’t see any way this is possible now, given the extreme levels of inflation. The Fed plans to raise rates for the first time next month. It is likely that they will only raise by one-quarter of a point. This, again, if far too little, far too late. The sooner the Fed realizes how badly they have blundered, the sooner, we can hope, that they will wake up and pursue a much more aggressive rate raising strategy. The longer they wait, the more we all suffer.