Money & The EconomyOpinion

Is it Time to Replace Powell and Yellen?

Federal Reserve Chair Jerome Powell’s recent comments indicate he will continue his string of inaccurate and wrong forecasts about the economy. If it weren’t for the even poorer forecasting by Treasury Secretary Janet Yellen, we could conclude that Powell has the worst forecasting record of anyone in government.

It is well documented just how poorly Yellen’s forecasts have been. In June she finally admitted that she was wrong back in the Spring of 2021, when she and Powell said the high inflation in the first quarter was only temporary or transitory as they called it.

Nearly all unbiased economists will tell you that there has never been a period in history where inflation has been temporary, especially when caused primarily by excess demand. It is true that we often see price increases in specific markets that quickly fall once the market has corrected.

But inflation means that nearly all products are increasing in price, some much more than others. Once that starts, wages rise. Seeing higher costs to produce goods and services, business must raise their price to maintain profitability. That feeds more inflation, which leads to the very nasty wage-price spiral.

The inflation we are experiencing today is almost entirely caused by excess demand in the economy. This inflation is not significantly caused by supply shortages. While there are some products that are experiencing supply issues, and even though we are currently in a recession, the economy today, in total, is producing at a higher rate than before the pandemic.

If the aggregate supply is the same, then higher prices must be caused mostly by excess demand. The excess demand is due to the federal government spending nearly $6 trillion more than it received in tax revenue in the last two fiscal years. Even today, the Biden administration continues to deficit spend about $130 billion monthly.

The excess demand was also caused by Powell’s shockingly irresponsible monetary policy in 2021 and the first quarter of 2022. Powell continued a $120 billion monthly bond-buying program and kept interest rates near zero. Although there was a slight pause in inflation last summer, Powell followed an expansionary monetary policy while inflation was setting record highs almost monthly. And from May 2020 to June 2021, the economy experienced rapid growth.

The Recession Is Here

Powell’s latest comments are equally wrong. He recently said that a recession was “a possibility but not likely.” The reality is that we are in a recession right now. First quarter gross domestic product (GDP) growth was negative.

The first estimate of second quarter growth will be released next week. It will
likely be negative. That’s a recession.

Even if the second quarter number is slightly positive, the economy will have no growth for the first half of the year. In other words, the economy is stagnant. A stagnant economy with high inflation is called stagflation, which is an exceedingly difficult problem to solve and requires early recognition.

Powell is also saying the inflation rate will fall as quickly as it went up. It appears that he, once again, is taking a biased view of circumstances. Essentially, he is saying that even if there was some excess demand, which was not enough to cause high inflation.

What really caused the inflation, Powell would say, was supply chain issues and labor shortages. This meant business could not respond to the higher demand by producing more output. So, it had to respond by raising prices. (Economists call this an inelastic supply.)

Lacking Objectivity

Thus, Powell reasons, the Fed should only reduce demand by a small amount. Since the supply is relatively fixed (inelastic), prices will fall quickly. Powell is optimistic that he can quickly reduce inflation, even if the Biden administration wants to increase government spending by hundreds of billions of dollars or more. This too is incorrect. Reducing inflation will take some time, perhaps years.

The two most influential economic advisors to the president are Janet Yellen and Jerome Powell. Their track records in their current positions indicate that they are not the most qualified people to be in those positions.

While both are highly intelligent and honorable people, they seem to
have lost their objectivity.

Unfortunately, when that happens, it is time for them to be replaced. If they stay on, the economic consequences will be very difficult, at best.

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Michael Busler

Michael Busler, Ph.D. is a public policy analyst and a Professor of Finance at Stockton University where he teaches undergraduate and graduate courses in Finance and Economics. He has written Op-ed columns in major newspapers for more than 35 years.

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