The Fed's "Do Nothing" Strategy Proves Costly At a time when Americans are tightening wallets, the Fed should take its cues from the families who are pinching pennies to make ends meet.
By John Burnett •
Opinions expressed by Entrepreneur contributors are their own.
American families feel the pinch of rising inflation rates from grocery store aisles and gas pumps to the real estate market. The Federal Reserve, which recently approved the first interest rate hike in more than three years, is now struggling to play catch-up to our economic reality — and is poised to raise it again in early May. But it did not have to turn out this way.
Had Federal Reserve Chair, Jerome Powell, listened to the counsel he'd been receiving over the last three years, our economy might be headed for a softer landing to the inflation crisis instead of the hard crash many are now fearing.
Related: How to Protect Your Profits From Inflation During a Global Crisis
Before and throughout the COVID-19 pandemic, countless leading voices in Powell's ears foretold a situation very much like our current economic state, including former Dallas Federal Reserve Bank President, Robert S. Kaplan, who as far back as a year ago, indicated that the Fed would need to start raising interest rates to prevent inflation. According to Reuters, Kaplan stated, "We are now at a point where I'm observing excesses and imbalances in financial markets," noting soaring stock and home prices in April 2021.
During the height of the pandemic, when the economy was dealt a devastating blow, the Fed was focused on cutting interest rates to reduce economic hardship. That was understandable enough. But Powell and the Fed missed or ignored warning signs, even as investors started signaling more than a year ago that their greatest market fear is inflation, not COVID-19.
Powell seemed to set Fed policy on cruise control, rigidly adhering to a policy of low interest rates and refusing to demonstrate the flexibility required to quickly adapt to changing conditions, such as labor shortages and supply chain disruptions. Powell's inflation-tolerant monetary policy framework has left the Fed "behind the curve in controlling inflation," according to former New York Federal Reserve Bank President, Bill Dudley. Had the Fed heeded sound warnings to embrace flexibility and responsiveness, the Fed's expedited actions now to tame the inflation crisis might not appear to be as late in the game.
With a shift in approach or alternate series of global events, we might be on a different footing today. Few could have predicted a year ago that war would rage in Eastern Europe — but once again, predictable unpredictability is the only certainty.
Former Federal Reserve vice chairman, Alan Blinder, recently noted that had war in Ukraine not broken out, the Fed might have escaped with Powell's approach, and there was a chance that inflation would turn downward. However, he concluded, "Now, unfortunately, that optimism looks rather out of date."
To be sure, Powell's policies reflected an overall consensus that the economy would slide into a recession — or worse — without aggressive fiscal and monetary policy to keep the economy moving. But among Powell's failures was not anticipating and preparing for the economy to suddenly shift to its hottest pace in decades. Indeed, Powell has shared his frustration over the situation, clearly showing that the current inflationary pressures have not eased the way the Fed thought they would.
At a time when Americans are tightening wallets, the Fed should take its cues from the families who are pinching pennies to make ends meet. In many ways, our economy is now on even more shaky grounds than at the height of the pandemic. We need a return to restraint in spending, discourage leaders from embracing greater taxation and promote energy independence that spurs economic growth. Collectively, these approaches have the potential to quell fears, restore consumer confidence and stabilize markets.
Now, the Fed is poised to move in the direction of hefty interest rate hikes and a shrinking balance sheet to tame inflation. Let's hope it's not too late to tame the inflation curve. Our economy and the future of the working class depends on it.
Related: What History Tells Us About Inflation's Impact on Everyday Americans
