This led to an extreme and some say excessive government stimulus. The result; rising inflation and a critical mistake by the Federal Reserve that led our economy to a potential unresolvable crisis.
It was a single but critical misjudgment by the Federal Reserve that has now made it impossible for the U.S. economy to not enter a deep recession with high and persistent inflation that will scar the economy for years to come.
The Federal Reserve for Years Maintained a Belief That Inflation Was Transitory
Based on the assumption that rising inflation was a transitory scenario that would work itself out over time naturally the Fed did nothing. By not raising interest rates years earlier when inflation began to rise, they sealed the fate of creating the economic scenario were currently in. This inaction put the Federal Reserve in a position where its actions were absolutely too little too late.
Because the Federal Reserve did not react in a timely manner, it lost its ability to effectively stop inflation from rising and more importantly set into stone the pain and hardship that the upcoming recession will have on the U.S. economy and its citizens.
There is never been a time in history when the Federal Reserve effectively reduced inflation without moving their key interest rates to at least equal to the current level of inflation. When inflation began to rise and was at 3% or 4%. The pandemic and recession in 2020 resulted in average inflationary pressures to come in at 1.2%. By 2021 inflation began in January at 1.4% and rose to 2.6% in March 2021.
If the Federal Reserve acted and begun to raise rates and not maintain that inflation was transitory, it could have had a dramatic impact. Instead, the Federal Reserve did nothing. Had they acted at this point and began to slowly raise interest rates which had been set artificially low between 0 and ¼% they would’ve had a tremendous impact just by taking interest rates to 2%.
In April 2021 inflation was running at 4.2% in the Federal Reserve continued to do nothing and keep interest rates artificially low. By May 2021 inflation had risen to 5%, 5.4% in June and still the Federal Reserve did nothing. In fact, inflation rose to 6.2% in October, 6.8% in November, and 7% in December and still the Federal Reserve did nothing and kept interest rates artificially low at 02 ¼%.
By the time the Federal Reserve initiated its first interest rate hike in March 2022 inflation was already at 8 ½%. At this point, it would require the Federal Reserve to raise rates to at least 8% to have any sustainable impact to reduce inflation.
It is clear that the signs of rising inflation that occurred in 2021 showed a clear and systemic growth by the first quarter the point at which the Federal Reserve needed to act and did not. It was his primary misjudgment that inflation was transitory that led to the inaction of the Federal Reserve until it was too late.
Now the Federal Reserve is dealing with attempting to reduce and level of inflation and interest rate that cannot be supported for any sustainable period of time. With the national debt well over 120% of GDP if interest rates were raised today from 3% to 8% it would add $1.5 trillion per year to service our national debt.
Clearly, the Federal Reserve has painted itself into the corner and by a critical mistake that led them to do nothing when they could’ve had a strong and immediate impact on inflation, instead, they sat on the sidelines and watched interest rates rise out of control.
What will come in the years ahead will be the fallout from the inaction of the Federal Reserve which most certainly will be a deep and sustained recession and inflation that remains persistent and high above 4% in a best-case scenario.
For those who would like more information simply use this link.
Wishing you as always good trading and good health,
Gary S. Wagner