Powell would like to go down in history like Volcker, for doing the right thing in the face of political pressure. Yesterday he admitted to a Senate panel that raising rates might cause a recession, and he did Biden no favors in the narrative department.

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If we’re being fair though, we have to acknowledge that Trump’s stimulus checks, the Paycheck Protection Program, and the Fed’s own bailout of the bond market created this inflation. In all, the Cares Act airdropped $2.2 trillion of free money, while the Fed slashed rates to zero and invited Americans to consume their newly inflated home equity via cash-out refi loans. Powell doubled the Fed’s balance sheet, and was still printing money into 2022, well after we had seen major inflation.

Everyone knew prices would soar, but they didn’t care. Deflation is the Fed’s greatest fear, for how it discourages taking on debt, so they don’t mind a little “overshoot” in CPI. Covid-crippled supply chains and the war in Ukraine make for convenient excuses, but as Milton Friedman said, inflation is always and everywhere a monetary phenomenon. There’s plenty of blame to go around, and if Powell had shown any guts in the last two years he wouldn’t have to play hawk today.

 

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