This is what happens when the Fed Chair is clueless or lying:
It took only a 10-minute speech from Federal Reserve Chairman Jerome Powell on Friday to clarify that monetary policy would be relentlessly tightened in the months ahead. Investors dumped stocks, sending the S&P 500 Index down 3.4% following two days of gains.
And it all was based on two Big Lies that the federal government can run short of dollars, and that federal deficits cause inflation.
Both Big Lies are so obvious, so easily debunked, that it’s hard to believe they are accidental or based on ignorance. Lies that big and easily seen simply must be intentional.
Powell: Fed’s inflation fight could bring ‘pain,’ job losses
By CHRISTOPHER RUGABER
August 26, 2022
JACKSON HOLE, Wyoming (AP) — Federal Reserve Chair Jerome Powell delivered a stark warning Friday about the Fed’s determination to fight inflation with more sharp interest rate hikes:It will likely cause pain for Americans in the form of a weaker economy and job losses.
Powell believes the way to fight inflation is to cause a recession (aka a weaker economy and job losses).
But inflation is not the opposite of recession. The opposite of inflation is deflation. We can have inflation and recession at the same time. It’s called “stagflation,” a problem for which the Fed knows no cure (though there is one).
The message landed with a thud on Wall Street, sending the Dow Jones Industrial Average down more than 1,000 points for the day.
“These are the unfortunate costs of reducing inflation,” Powell said in a high-profile speech at the Fed’s annual economic symposium in Jackson Hole. “But a failure to restore price stability would mean far greater pain.”
The pain is wholly unnecessary. Inflation is not a problem. It is the symptom of a problem, the shortage of crucial goods and services.
Today’s inflation is caused by shortages of oil, food, shipping, lumber, paper, computer chips, many chemicals, labor and a long list of other goods and services. Most of those shortages resulted from COVID.
To cure a problem one must cure the causes. Low interest rates did not cause inflation, so raising interest rates will not cure inflation.
The U.S. had extremely low interest rates for more than a decade, beginning 2009, and inflation remained low. Clearly, low rates were no a cause of inflation, so raising rates will not cure inflation.
As the above graph shows, however, raising interest rates leads to recessions.
Further, there is no relationship between inflation and federal deficit spending, so increasing federal spending will not cause inflation:
Therefore, the Fed is promoting two activities — raising interes rates and reduced federal deficit spending — neither of which willconomy, even as the unemployment rate has fallen to a half-century low of 3.5%.
It has also created political risks for President Joe Biden and congressional Democrats in this fall’s elections, with Republicans denouncing Biden’s $1.9 trillion financial support package, approved last year, as having fueled inflation.
The $1.9 trillion financial package did not fuel inflation, but it did help hold off a recession. For political purposes, the GOP wants to see inflation and recession come during the Biden administration, so they denounce federal deficit spending.
And here comes the ridiculous part:
Some on Wall Street expect the economy to fall into recession later this year or early next year, after which they expect the Fed to reverse itself and reduce rates.
Wall Street is correct. That is exactly what will happen. If the Fed continues it interest rate increases, and the federal government doesn’t increase its deficit spending, we will have a recession.
Then the Fed will cut interest rates, which again will accomplish nothing. But the Fed will picture itself as struggling mightily and bravely against inflation and recession.
Any failures will be “beyond their control,” and any successes will “result from their actions.” They can’t lose.
Powell reminds me of a child sitting in the back seat with a toy steering wheel. Whenever the car turns, he turns his wheel. He thinks he is driving the car but he is only going through motions.
A number of Fed officials, though, have pushed back against that notion. Powell’s remarks suggested that the Fed is aiming to raise its benchmark rate — to about 3.75% to 4% by next year — yet not so high as to tank the economy, in hopes of slowing growth long enough to conquer high inflation.
Graph I showed that interest rate increases lead to recessions. Graph III shows that raising interest rates will will have an adverse effect on real Gross Domestic Product growth. (GDP is shown as negative growth).
After raising its key short-term rate by a steep three-quarters of a point at each of its past two meetings — part of the Fed’s fastest series of hikes since the early 1980s — Powell said the Fed might ease up on that pace “at some point,” suggesting that any such slowing isn’t near.
Powell said the size of the Fed’s rate increase at its next meeting in late September — whether one-half or three-quarters of a percentage point — will depend on inflation and jobs data.
An increase of either size, though, would exceed the Fed’s traditional quarter-point hike, a reflection of how severe inflation has become.
The Fed chair said that while lower inflation readings that have been reported for July have been “welcome,” he added that, “a single month’s improvement falls far short of what (Fed policymakers) will need to see before we are confident that inflation is moving down.”
Nothing the Fed has done, to date, has reduced inflation. Any inflation reductions have come from reduced shortages of oil and other commodities. The car turned, and Powell sitting in the back seat thinks he turned it.
“The historical record cautions strongly against prematurely” lowering interest rates, he said. “We must keep at it until the job is done.”
Yes, Chairman Powell, you keep turning your toy steering wheel, and after we go through a stagflation, which will end with increased federal deficit spending to cure shortages, you can claim credit.
(The Fed’s interest rate) hikes have led to higher costs for mortgages, car loans and other consumer and business borrowing.
Home sales have been plunging since the Fed first signaled it would raise borrowing costs.
Translation: The Fed already has begun to cause a painful recession while inflation continues.
Powell is betting that he can engineer a high-risk outcome: Slow the economy enough to ease inflation pressures yet not so much as to trigger a recession.
The little boy in the back seat furiously spins his steering wheel.
At last year’s Jackson Hole symposium, Powell listed five reasons why he thought inflation would be “transitory.” Yet instead it has persisted, and many economists have noted that those remarks haven’t aged well.
America asked the man who said inflation was “transitory,” now asks the same man to cure inflation. Powell neither has the know-how nor the tools.
He doesn’t understand was causes inflation (shortages) nor how to cure it (spend to cure the shortages). He is applying leeches to cure anemia, hoping that won’t make the anemia worse.
Stagflation, here we come. Ludicrous.
- Raising interest rates does not cure the causes of inflation, which are shortages of key goods and services.
- Reducing federal deficit spending does not cure the causes of inflation, but does lead to recessions.
- Increasing interest rates does not cure the causes of inflation, but does lead to recessions.
Conclusion: The Fed actions will not cure inflation but will cause a recession. Increased federal deficit spending to cure shortages will prevent a recession, and will not cause inflation.