As an economist, I find Federal Reserve Chair Jerome Powell’s press conferences increasingly frustrating to watch. It’s not because Powell responds with well-crafted answers to the journalists’ inquiries. It’s because the journalists fail to ask the tough and obvious questions that could reveal the misguided nature of the Fed’s data-dependent and overly hawkish monetary policy. Milton Friedman famously stated that inflation is “always and everywhere a monetary phenomenon.” So why does Powell not even mention the significant swings in the broad money supply (M2) that have occurred under his leadership when discussing the economic outlook?
The broad money supply has experienced dramatic changes under Powell’s watch. From the beginning of 2020 to the end of 2021, it increased by a staggering 40%. However, it is now contracting for the first time since the Federal Reserve began tracking these numbers in 1959. This raises an important question that journalists fail to pose: just as the expanding money supply in 2020 and 2021 led to a delayed surge in inflation, reaching a multi-decade high of over 9% by June 2022, could the unprecedented contraction of the money supply we are currently witnessing lead to a recession and a renewed period of deflation next year?
Another concern that is not being adequately addressed is the effect of the Fed’s continued interest-rate hikes and aggressive quantitative tightening. Could these actions contribute to a further contraction that puts excessive downward pressure on the economy? A recent Federal Reserve study revealed that as many as 37% of US companies are in distressed debt situations, a troubling figure for this stage of the credit cycle. It is also known that commercial-property owners are struggling with low occupancy rates as more workers choose to work from home.
One factor that has helped the US economy withstand the Fed’s aggressive monetary policy thus far is the savings accumulated from the substantial COVID-related government checks distributed to households and companies. However, it is important to consider that over the next two years, these companies will need to roll over $500 billion a year at higher interest rates. Meanwhile, journalists neglect to question Powell on whether the rapid pace at which the Fed has increased interest rates, especially while many companies are dealing with distressed debt situations, could lead to a real credit crunch in 2024, resulting in a wave of corporate debt defaults.
Furthermore, it is crucial to address the impact of international economic developments on our own economy. Notably, China, the world’s second-largest economy, is currently facing challenges due to the burst of its inflated property and credit market bubble. Could a slowing Chinese economy exert further downward pressure on international commodity prices and significantly dampen the US and global economies? Yet journalists rarely inquire about these potential consequences.
By failing to ask Powell these pertinent questions, journalists are doing us a disservice. They allow the Fed chief to persist with a policy that is overly restrictive, disregards changing monetary, financial, and external economic conditions, and largely ignores the time delays that monetary policy operates under. It is imperative to challenge Powell and encourage a more thoughtful and comprehensive approach to monetary policy.
Desmond Lachman, a senior fellow at the American Enterprise Institute, brings a wealth of experience as a former deputy director in the International Monetary Fund’s Policy Development and Review Department and as the chief emerging-market economic strategist at Salomon Smith Barney. His insights provide valuable perspective on the issues at hand.
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