Fed’s Powell Facing An Inflation-Recession Catch 22?

Fed Chm Powell is finally going to raise interests rates a quarter point shortly, but by dithering so long in doing so he may already have boxed himself in a “Recession-Inflation” Catch 22, as WSJ suggests in “The Humbling of the Federal Reserve.”

As the editors suggest, keeping interest rates at historically (aka ridiculously) low levels to not only overcome the Obama Era stagnation hangover but for yet another two years of Covid economic lockdowns may have kept the production machines humming, but coupled with unprecedented federal “rescue-relief” spending, it didn’t take Milton Friedman to realize the run-away inflation we’re now seeing was also a certainty. Ironically, by belatedly upping the gov’t’s interest rate (with several more hikes likely coming later this yr), we’re warned the sudden (rather than a gradual) dose of cold water could send the economy into … RECESSION.

“What went wrong?” the WSJ asks. For one, the Fed is dominated “10 to 1” by progressive Democrats who use a Keynesian model (aka government spending & consumer demand solves all problems) to predict future events that never go the way they thought because … it doesn’t adequately account for the impact of high taxes, production disincentives via over-burdensome regulations and the warping of human nature inundated with free “stuff.” Concluded the editors: “Lifting off from zero would have been far easier if the Fed had started to [raise interest rates] long ago.” Now, Mr. Powell has little choice in facing what may be a no-win situation: Spiraling inflation stopped only with recession.

Davd Soul