Experts fear Fed Chair Jerome Powell, haunted by Paul Volcker's legacy, could harm the economy

 Economists are increasingly expressing concerns that the actions of the Federal Reserve (Fed) may be pushing the United States and the global economy into a deeper recession than necessary, posing risks to millions of jobs and overall market stability. The apprehension stems from the fear that the current Fed Chair, Jerome Powell, might be following an outdated playbook pioneered by his predecessor, Paul Volcker, which could potentially result in an extended period of economic downturn. This has ignited a debate over the appropriate course of action in response to the sharpest inflation spike in four decades.

When Powell assumed the position of Federal Reserve Chair in early 2018, he found inspiration in Paul Volcker's memoir, "Keeping At It: The Quest for Sound Money and Good Government." Powell often joked that he should distribute 500 copies of the book at the Fed, acknowledging the influence and respect he held for Volcker. At that time, however, inflation was relatively low at just 2%, and Volcker was renowned for his successful efforts in curbing high inflation during the 1970s and early 1980s, even though it led to a painful recession. Hence, there seemed to be no immediate need to replicate that strategy.

Fast forward to the present, and Powell is now confronted with the highest inflation rate in 40 years. Critics worry that he might be adhering too closely to Volcker's approach, implementing tight monetary policies for an extended period, and inadvertently triggering a more severe recession than necessary, both domestically and globally. Powell has frequently referenced Volcker's memoir this year when discussing interest rate hikes, emphasizing the need for the Fed to persist until inflation subsides. He has argued against the stop-and-start policy approach employed in the 1970s under Volcker's predecessor, Arthur Burns, claiming that it resulted in stagflation—prolonged inflation coupled with stagnant economic growth—thus making it even more challenging to rein in soaring prices.

On Wednesday, the Fed announced its fourth consecutive interest rate hike in six months, increasing the key federal funds rate to a target range of 3.75% to 4%, the highest level since the Great Recession. While officials hinted at potentially slowing the pace of rate hikes in December, Powell, in the subsequent press conference, maintained his hawkish stance. He stated that recent economic data suggests the Fed may ultimately raise rates to higher levels than projected in September, cautioning against the risk of doing too little in terms of rate hikes rather than doing too much.

Powell defended the Fed's position by saying, "We want to get this exactly right, but if we over-tighten, then we have the ability with our tools to support economic activity Powell expressed concern that this was what happened during the 1970s and early 1980s when expectations of high inflation took hold, leading to demands for higher wages and exacerbating the problem.

Claudia Sahm, a former Fed economist and founder of Sahm Consulting, lamented the current approach, stating that the Fed is repeating the mistakes of the past. She believes that the central bank has painted itself into a corner by insisting on an aggressive policy until the consumer price index, which is a lagging indicator of inflation, substantially decreases over several months. Sahm argues that the current situation is different from the 1970s, citing forward-looking indicators like flat producer prices in September as evidence that inflation is waning and expectations are not yet deeply entrenched.

Notably, economists across the spectrum, including traditionally hawkish ones, are expressing concerns about the Federal Reserve potentially waiting too long to pause or slow down its aggressive tightening measures. Ian Shepherdson, founder and chief economist at Pantheon Macroeconomics, argued that the Fed's actions risk pushing the economy into a severe recession and that there is little evidence that inflation expectations are becoming unanchored. He advocates for a more data-dependent approach, allowing the central bank to assess the impact of rate hikes before making further decisions.

In summary, economists are becoming increasingly worried about the actions of Federal Reserve Chair Jerome Powell, fearing that his approach, influenced by the legacy of Paul Volcker, could result in a deeper recession and pose risks to job growth and market stability. While Powell aims to combat high inflation and prevent expectations of sustained price increases, critics argue that he may be adhering too strictly to outdated policies and tightening monetary measures excessively and for too long, potentially exacerbating economic challenges both domestically and internationally. The debate over the appropriate course of action continues, with economists urging a more cautious and data-dependent approach to prevent unintended consequences.