The Federal Reserve fell asleep


As a Babson MBA graduate, I am very disappointed with the Federal Reserve’s very belated acknowledgment of the runaway inflation that is affecting our country. Inflation is hovering at 8.5% from a year ago, and the Federal Reserve (Fed) only started raising interest rates in March 2022 in an attempt to meet its target of 2 .0%. How did we get to this debacle?

The Covid pandemic during the period 2020 to 2021 necessitated the implementation of relief plans, which led the Treasury Department to inject nearly $4 trillion in programs and tax credits into the American economy . The availability of these funds and the savings accumulated by consumers in 2020 and 2021 provided a springboard for the demand triggered in the last half of 2021 and into 2022. This provided the main impetus for the escalation of inflation. A secondary cause was supply chain constraints, and a tertiary cause was the war in Ukraine.

But where was the Fed in its role of implementing monetary policy and controlling inflation? Over the 2020-2021 period, the Fed kept its federal funds rate at a floor of 0.00% to 0.25% and, with quantitative easing (QE), increased its assets on the balance sheet by $4 trillion to $9 trillion. This monetary policy was designed to combat the economic impact of the pandemic, but inflationary pressures intensified towards the middle of 2021 when I told my family members that the Fed should raise interest rates and terminate its QE program. The Fed has kept its interest rate near zero and its large monthly purchases of tens of billions of dollars of Treasury securities through 2022, which has increased the money supply and the availability of bank loans. This was expansionary and continued upward inflationary pressures.

As inflation continued to rise, the Fed mistakenly believed that the rise in inflation was transitory and would come down. The Fed finally woke up and determined that inflation was pervasive and began to belatedly raise interest rates and end its purchases of Treasuries in March 2022.

Note: The Fed is a nonpartisan entity responsible for implementing monetary policy. US administrations are responsible for fiscal policy (eg spending, taxes).

Donald Moskowitz

Londonderry NH


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