Addressing Fed Incompetence More Important Than Preserving Fed Independence

The Federal Reserve has been both highly political and extremely incompetent under Fed Chair Powell.  The Fed Chair was an aggressive proponent of excessive government spending during and after the Pandemic and has recently opposed the Trump administration’s tariff policy.  In addition, the Powell Fed has been highly incompetent as it has adopted the Keynesian Phillips Curve theory of inflation and has completely ignored unprecedented increases in the money supply that are always inflationary.  This flawed economic view led to the disastrous “transitory” theory of inflation advocated by Powell and the Biden administration and led to double-digit inflation.  Also, the Powell Fed has failed to recognize that the BLS estimate of shelter inflation in CPI (CPI-U) lags market measures of shelter costs (CPI-R) by approximately 2 years (see graph below). In addition, the Powell Fed tightened policy 5 times during 2018 despite the fact that inflation never exceeded 2% and nearly precipitated a recession.

CPI-R continues to be a leading indicator for CPI-U

The Fed has been a complete disaster over the last 20 years after the Fed adopted the too restrictive 2% inflation target with no empirical evidence to support that target.  This policy rule supplanted the judgement which had been successfully exercised by Chair Greenspan that allowed the Fed to avoid significant spikes in inflation and avoid deep recessions while lowering stock market volatility/risk.  The adoption of the arbitrary 2% inflation ceiling led to the Fed raising rates 17 meetings in a row from 2004 to 2006 despite the fact that inflation never significantly exceeded 2% (see chart below).  This hawkish policy tightening precipitated the Great Financial Crisis.  The Fed has precipitated all 13 post WWII recessions through policy tightenings.

The real checks on the Fed are elections. Chair Powell was renominated by Biden then adopted the administration’s “transitory” theory of inflation as Treasury Secretary Yellen tried to assert that inflation was not a problem and advocated that the congress should pass a massive $6 trillion spending bill.   The failure to tighten policy earlier led to double-digit real-time inflation (see above) and was the key reason that the Democrats lost the presidential election.  Consequently, it is not necessary for the Fed to be theoretically independent as it is always influenced by politics and the political party in charge will always pay a steep price if the Fed commits a policy error by being either too loose or too tight with monetary policy.  Consequently, an incoming President should be allowed to appoint all the Federal Reserve Board Members including the Chairman upon taking office.  That policy would ensure that Presidents are not punished by the actions of a Fed that they did not appoint.