Federal Reserve Chairman Jerome Powell is living a charmed life.
The pandemic gave him cover to keep the Fed’s Great Recession-era bubbles pumped up. Now, he can use tariffs as a scapegoat as the inevitable effects of the Fed’s reckless monetary malfeasance during the pandemic and the Great Recession play out.
Blame Game
Powell is already setting up tariffs as a scapegoat.
During a speech at the Economic Club of Chicago, Powell issued a blunt warning – we could be on the verge of stagflation.
He blamed tariffs, bemoaning that they are “significantly larger than anticipated.”
“The same is likely to be true of the economic effects, which will include higher inflation and slower growth.”
Rising price inflation and slow growth define stagflation.
Powell worried out loud that the economic situation makes it difficult for the central bank to carry out its “dual mandate” – maintaining stable prices and maximum employment, calling it a “challenging scenario.”
Powell and his fellow central bankers have been walking a tightrope. For a long time. He finally acknowledged it during the speech. As the AP described it, “The Fed would essentially have to choose whether to keep interest rates high to fight inflation or cut them to spur growth and hiring.”
“Our tool only does one of those two things at the same time,” Powell said during a Q&A session.
This Catch-22 Isn’t New
Powell just described the Catch-22 I wrote about back in January before Trump was even inaugurated.
I’ve been saying for months that the central bank never did enough to slay the inflation dragon it resurrected with its massive money injection during the pandemic. It needs to hold rates higher for longer, and likely raise rates, to truly get inflation under control.
On the other hand, this debt-riddled bubble economy can’t function in a high-interest rate environment. It needs its easy money drug.
In other words, the Fed needs to simultaneously raise rates to battle price inflation and cut rates to keep the air in the bubbles.
It can’t do both.
Even Reuters recognized the dilemma facing the Fed back in January.
“Extreme bond market agitation has put the Federal Reserve in a bind. It can either cool long-term inflation fears or acquiesce to President-elect Donald Trump's complaints about interest rates being 'far too high.' It can't do both and will likely opt to tackle the former, potentially setting up a running verbal battle with the White House over the coming year.” [Emphasis added]
Powell & Company Created This Problem
Markets are in turmoil, and more and more people in the mainstream are worried about a recession. In a recent survey of over 300 CEOs, over 60 percent said they believe the U.S. was heading for an economic downturn in the next six months.
If you listen to mainstream analysis, it’s all about tariffs.
But it’s not.
Tariff policy might be the pin that pops this bubble, but even if it isn’t, there is a pin out there with this bubble's name on it.
The $9 trillion question is who pumped up the bubble.
Answer – the Federal Reserve.
Simply put, without money creation, there is no bubble.
The Fed fuels bubbles by injecting money into the economy directly through quantitative easing (QE) and indirectly by keeping interest rates artificially low -- incentivizing massive debt. This is, by definition, inflation, and this easy money policy blows up bubbles.
When most people hear the word “inflation,” they think of rising consumer prices. But inflation typically shows up first in financial markets. It blows up asset bubbles in stocks, real estate, art, and other sectors. That's exactly what happened during the Fed’s easy money spree during the Great Recession. But the full effects didn’t hit consumer prices until the Fed doubled down on its monetary binge during the pandemic.
Consider the amount of inflation the Fed has created since the 2008 financial crisis. It pumped over $9 trillion into the economy through QE alone. On top of that, it suppressed interest rates for well over a decade.
That’s a tidal wave of inflation, and it blew up some mighty big bubbles.
This isn’t the first time the Fed has gotten into the bubble-blowing business. It pumped up the dot-com bubble in the 90s. It pumped up a real estate bubble in the early '00s.
What happened to those bubbles?
They popped.
Post-2008 Financial Crisis, the Fed went to work reinflating the bubble yet again. The air started to come out in 2018 after the central bank made a half-hearted effort to normalize monetary policy. You might remember the stock market crash that fall. And what did the central bank do? It cut interest rates and relaunched quantitative easing. Keep in mind, this bubble was leaking air before COVID-19 reared its ugly head.
The pandemic was a gift for Powell. It gave the Fed an excuse to go all in, blow the bubble to epic proportions, and kick the can down the road. Had it not been for COVID-19, the post-recession bubble probably would have popped years ago.
As I mentioned, Powell is living a charmed life.
And here we are today with an even bigger bubble economy that not even Reuters can ignore.
So, Powell can yell and scream about tariffs all day, but he owns the problem. He and his predecessors (Ben Bernanke and Janet Yellen specifically) set the stage. They held the air hose that blew up the bubbles. Sure, they might not be holding the pin. Blame that on President Trump if you want to. But without the actions of the central bank over the last 15 years, there wouldn’t be a bubble to pop.
It's worth revisiting what I wrote back in January.
This debt-riddled bubble economy can’t keep limping along in this higher interest rate environment. This is precisely why the Fed delivered a rate cut in December while simultaneously jawboning about caution and trying to dampen expectations of more rate cuts in 2025.
On the other hand – inflation.
You see, there is a big elephant standing middle of the family room. The Fed already wrecked the economy with well over a decade of easy money. It pumped nearly $9 trillion in new money (inflation) into the economy through quantitative easing alone from the onset of the Great Recession through the pandemic. That’s on top of the inflation it created with nearly a decade of zero percent interest rates.
That monetary malfeasance has consequences. It created a massive debt bubble and all kinds of malinvestments in the economy. The impact hasn't manifested yet.
When the economy visibly cracks, the Fed will be forced to get even more aggressive in loosening monetary policy - elevated inflation or not. If history is any indication, it will cut rates to zero again, and it will launch more rounds of QE. That means even more inflation.
The worst-case scenario is a protracted period of stagflation.
And what is Jerome Powell suddenly warning about four months later?
Stagflation.
Fortunately for the Fed chair, he has a scapegoat now.
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