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What is the Deal With the Fed?

What the FUCK, Jay Powell?!?

I'm sorry, that was a little aggressive, angry, and castigating. And maybe all of us have been a bit too critical of the Federal Reserve, which ultimately means the face of the Fed, Jay Powell.

For as long as we can remember (I think 9 months is about the human memory span, right?), we have been hearing about inflation, supply chain, soft landings, hard landings, and all kinds of other bullshit to help us understand what is going on with the economy.

Unfortunately, our clever human minds get very focused on immediacy (System 1 thinking) instead of long-term logic (System 2 thinking) when we are under stress or danger. Additionally, a bad economy is the modern version of a sabretooth tiger and we focus on NOW. 

Let's take a look at the last 15 years or so to see how we got to where we are today and hopefully migrate to System 2 thinking instead of what is immediately in front of us.

2008-2018 Review

Remember the financial crisis of 2008 and The Great Recession?! Of course, you do. The Fed hammered interest rates down to "historic lows" in order to combat the economic downturn of the time which was a good move, but we'll skip all the theory as to why for today.

The subsequent recovery had a bit of a rough start but was quite stable and through 2020 was one of the longest positive economic cycles we have ever seen. The interesting thing is that the Federal Reserve got a lot of flak back then, too. 

You see, theoretically, when interest rates are very low, we also start to see inflation increase. The problem (or lack of problem?) is that it never did in that whole ~10-year span. No unintended inflation occurred! The Fed would still try to anticipate inflation during that period and would increase rates slowly (this fights inflation) resulting in criticism for slowing down a great economy. 

The Jerome Powell Era (2018-Now)

Janet Yellen (the last Fed Chair) stepped down and eventually went to join Biden's cabinet as the Secretary of the Treasury. We got our boy Jay Powell called up to the Big Leagues to be the new face of the Fed.

Shortly after he came in to office, the Fed stated they would WAIT for inflation to show itself before they changed rates. A good reaction to the criticism Yellen received? Probably. 

But then the proverbial shit hit the fan when COVID hit and we got a perfect storm of inflation catalysts. Not only did we print trillions of dollars of stimulus, the global supply chain got WRECKED as factories shut down. This caused the money supply to increase and the supply of goods to decrease. Again, I'll skip the theory, but you probably used cash for toilet paper in 2020 because cash was losing value and TP couldn't be found.

So we went from nearly no inflation to 9% inflation in less than a year and the Fed has been caught flat-footed. So no what?!

Current Environment

The easiest way to fight inflation, as mentioned above, is to increase interest rates. Jay Powell waited until inflation was here (like he said he would) to begin raising rates. But now he is getting quite a bit of criticism for waiting too long. I want to set out to be the one to defend the Fed's decisions in the light of the complexity of the situation.

A lack of supply for goods can very well be the culprit in short-term inflationary events and this is what the Fed was banking on (ooo, nice pun). Unfortunately, supply chains are still struggling a bit and haven't been able to respond like we thought they would so we still see shockingly high inflation. We've also started to flirt with a recessionary economy.

Powell is now raising rates DOUBLE TIME to make up for it and vowed this morning to continue increasing rates until inflation is tempered. Sneak peak, increasing rates this quickly encourages recessions but not one will say that out loud.

My take is that the Fed knows more than we do and they are secretly waiting for supply chains to heal a bit, increased rates to begin working on inflation (it lags a bit), and probably for the economy to dip into a bit of a recession. No one is discussing the reality that if rates are increased too much while we are naturally entering a recession, it will simply exacerbate the recession and cause more harm than good.

For these reasons, we should lay off the guy and the Fed as a whole. They don't control the economy and they are the experts here. They also need to navigate the PR aspects of the job as we are all examples of dissecting every word they say. Everyone is an armchair expert, but the Fed is the real expert in this situation.