Why This is the Most Reckless Fed Ever, and What I Think the Fed

The Fed’s credibility shifted from Inflation Fighter under Volcker to Wealth Disparity Creator and Inflation Arsonist under Powell. And everyone knows it.

By Wolf Richter for WOLF STREET.

As stunningly and mindbogglingly bizarre as this sounds, it’s reality: Inflation has been spiking for over a year, getting worse and worse and worse, while the Fed denied it by saying, well, the economy is recovering, and then it denied it by saying, well, it’s just the “base effect.” And when inflation blew out after the base effect was over, the Fed said it was a “transitory” blip due to some supply chain snags. And when even the Fed acknowledged last fall that inflation had spread into services and rents, which don’t have supply chains all over China, it conceded that in fact there was an inflation problem – the infamous pivot.

By which time it was too late. The “inflationary mindset,” as I called it since early 2021, had been solidly established.

I’ve been screaming about it for over a year. By January 2021, I screamed that inflation was spreading broadly into the economy. By February 2021, I screamed that inflation was spreading into the service sector. And I screamed about inflation in the transportation sector. By March 2021, it was obvious, even to me, that “something big has changed,” based on the fact that consumers were suddenly willing to pay totally crazy prices for used cars, when many of them could have just driven what they already had for a while longer, which would have brought the market down, and with it prices.

But no, consumers suddenly started paying whatever. And I documented how companies were able to pass on higher prices because suddenly everyone was willing to pay whatever. And by April, producer prices were blowing out, and companies were able to pass them on, no problem. And in April, I started using a term for this phenomenon: the “inflationary mindset” and how it had suddenly become established.

By that time in April, it was clear beyond a reasonable doubt that inflation would become a massive problem because the inflationary mindset had been established with companies paying higher prices, confident they could pass them on, and with consumers willing to pay whatever.

And all along – despite our screaming in the trenches – the Fed stuck to its “transitory” nonsense, while continuing to throw huge quantities of gasoline on the already raging fire, by interest rate repression and money-printing, as only a true inflation arsonist would.

And then when the Fed finally could no longer brush it off in the fall of 2021, as inflation continued to get worse and worse, the Fed made its infamous pivot, verbally. But it continued to pour the gasoline on the fire.

The Fed eventually started to slowly dial back the amount of gasoline it was still pumping directly on the fire: It reduced QE gradually instead of ending it cold turkey right then and there when it did the pivot. And it put rate…