The Fed’s “Do Nothing” Strategy Proves Costly

Opinions expressed by Entrepreneur the collaborators are his.

American households are feeling the pinch of rising inflation rates from the aisles of grocery stores and gas pumps to the real estate market. The Federal Reserve, which recently approved the first rate hike in more than three years, is now struggling to catch up with our economic reality and is ready to raise it again in early May. But it didn’t have to be that way.

If Federal Reserve Chairman Jerome Powell had listened to the advice he had been receiving for the past three years, our economy could be heading for a softer landing on the inflation crisis rather than the harsh crack that many fear now.

Related: How to protect your profits from inflation during a global crisis
Before and during the COVID-19 pandemic, countless voices in Powell’s ears predicted a situation very similar to our current economic situation, including former Federal Reserve Bank of Dallas President Robert S. Kaplan, who already a year ago he indicated that the Fed should start raising interest rates to avoid inflation. According to Reuters, Kaplan said: “We are now at a point where I am seeing excesses and imbalances in the financial markets,” noting the rise in stock and house prices in April 2021.
During the height of the pandemic, when the economy received a devastating blow, the Fed focused on lowering interest rates to reduce economic hardship. That was understandable enough. But Powell and the Fed lost or ignored the warning signs, although investors began pointing out more than a year ago that their biggest fear in the market is inflation, not COVID-19.
Powell appeared to establish the Fed’s cruise control policy, rigidly adhering to a low interest rate policy and refusing to demonstrate the flexibility needed to adapt quickly to changing conditions, such as the scarcity of labor and supply chain disruptions. Powell’s inflation-tolerant monetary policy framework has left the Fed “behind the curve in controlling inflation,” according to former chairman of the Federal Reserve Bank of New York, Bill Dudley. If the Fed had heeded strong warnings to adopt flexibility and responsiveness, the Fed’s accelerated actions now to control the inflation crisis may not seem so advanced.
With a change of approach or an alternative series of global events, we could be in a different situation today. Few could have predicted a year ago that war would break out in Eastern Europe, but once again, predictable unpredictability is the only certainty.
Former Federal Reserve Vice President Alan Blinder recently noted that if the war in Ukraine had not erupted, the Fed could have escaped with Powell’s approach, and inflation was likely to fall. However, he concluded: “Now, unfortunately, this optimism seems quite outdated.”
Undoubtedly, Powell’s policies reflected a general consensus that the economy would enter a recession, or worse, without an 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 change at its fastest pace in decades. In fact, Powell has shared his frustration with the situation, making it clear that current inflationary pressures have not eased as the Fed thought they would.
At a time when Americans are adjusting their portfolios, the Fed should follow the directions of families who are pinching pennies to reach the end of the month. In many ways, our economy is now on even more unstable ground than at the height of the pandemic. We need a return to spending moderation, discouraging leaders from adopting higher taxation, and promoting energy independence that stimulates economic growth. Taken together, these approaches have the potential to allay fears, restore consumer confidence, and stabilize markets.
The Fed is now ready to move in the direction of sharp interest rate hikes and a reduced balance sheet to control inflation. Hopefully it’s not too late to tame the inflation curve. Our economy and the future of the working class depend on it.

Related: What History Tells Us About the Impact of Inflation on Everyday Americans

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