Fighting The Eternal Fire

The Federal Reserve’s vaunted independence, which we heard so much about during the Trump Administration but very little so far under President Biden, will be put to the test this year as it battles 1980s-style inflation during an election year. Will the Fed fight vigorously to fight inflation that now totals an annualized 8.5% according to the March consumer price index, as it now insists it will, or will it suddenly wimp out just before November 8 if it senses that raising interest rates to the point of recession is a cure worse than the inflation disease?

Needless to say, the Fed is just as guilty as the fiscal authorities for creating runaway inflation, no, we can only blame some of this on Vladimir Putin. Since the 2008 global financial crisis, with just a couple of short, minor pauses, the Fed has kept interest rates artificially low and pumped trillions of dollars into the economy long after any emergency justified it doing so. Now, finally, the Fed has come to the realization that monetary accommodation has gone on too far and too long and is now ready to tap on the brakes. It’s already begun the interest rate raising process and will soon start reducing “at a rapid pace” its $9 trillion balance sheet, according to Fed Vice Chair designate and current Fed Governor Lael Brainard.

“It is of paramount importance to get inflation down,” the formerly dovish Brainard said recently at a Minneapolis Fed conference.

And what, pray tell, is the Biden Administration doing to try to stifle inflation? Why, it’s prolonging already generous government handouts. Last week the White House announced that, justified or not, it is extending yet again the moratorium on student loan payments, which has now been in effect for the past two years since the Covid-19 pandemic lockdown was imposed in March 2020 and has been extended several times since. Now, borrowers who owe their fellow taxpayers nearly $2 trillion of debt won’t have to pay anything until at least August, if not beyond that.

Let’s not forget that part of Candidate Biden’s platform in the 2020 election was to permanently forgive a certain amount of that debt, an action he has yet to make, instead issuing one debt moratorium after another under Covid cover. We’re supposed to believe that the moratoriums will end “sometime,” according to White House Press Secretary Jen Psaki, but that begs an awful lot of credibility, or naivete, among voters.

This being an election year, what do you think has a better chance of happening:

A. The student debt moratorium being extended yet again, right before the election
B. Total debt forgiveness, as the Democrats, have promised repeatedly
C. Or a presidential edict that student borrowers must immediately resume their payments

Those who answered C need to retake American Politics 101.

This is on top of other government benefits and work discouragement programs that show no signs of stopping. Not to mention failure to release the hounds in the energy industry to get cheaper gasoline to America’s drivers.

President Biden’s policies, rather than those of President Putin, bear much of the responsibility for the current rate of inflation. Yet our president shows no signs of accepting that blame nor doing something about it, which leaves the Fed to clean up the mess all by itself.

Back in 2019, if you remember, the former president of the New York Fed, William Dudley, suggested in a signed article on Bloomberg, not in some off-mike comment when he thought no one was listening, that the Fed deliberately tank the economy in order to sabotage President Trump’s reelection prospects. I wonder what would happen if Jerome Powell or some other senior Fed official suggested something similar in order to get the White House and Congress to step up to the plate and do their part in bringing inflation and government spending under control.

Of course, that would be incredibly irresponsible and reckless and require their removal from office, but is it any more irresponsible than the reckless behavior of those in Washington to not only do nothing about inflation but to actually do things to make it worse?

The fiscal and monetary authorities together have created the inflation that worries most Americans, yet only the monetary side seems required to do something about it, even at the risk of throwing the U.S. economy into recession, although Powell seems to believe the Fed can create a “soft landing” and ease inflation without it getting to that point. We’ll see. But it’s hard to see how the Fed can do that without some simultaneous restraint on fiscal spending, which seems less and less likely to happen before November 8. So if the Fed is being asked to put out the inflation fire, the least the fiscal authorities can do is to stop fanning the flames.

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George Yacik Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.

2 thoughts on “Fighting The Eternal Fire

  1. Wh#o knows what the Fed will do? As we have discovered over the past few months,the Fed ,especially Jay Powell have zero credibility. Four acussed of insider trading,three resigned,Powell did not although guilty.The Fed and our gov't have a mandate and that is to reduce the # of elderly by starving them financially and now with the 8.6% inflation ( understated by 7%)another Fed lie) starving them physically(many living on 1-2 meals a day) food prices so high.If the Gov't can killl enough seniors,it will permit the social programs to survive.Covid helped a lot and now inflation will do the rest.

  2. This is why republicans and Trump won the presidency the first time around. Too bad he turned out to be a nut job!

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