September 30, 2022 | OPINION | By Zoraiz Zafar
Have you ever wondered what it feels like to be the most powerful person in the world? You’d be surprised to know that that title is not bestowed upon Joe Biden, Xi Jinping, or even Margot Robbie for that matter. That is a title, and responsibility, given to one Jerome Powell, the Chair of the Federal Reserve. If President Biden’s words have the power to move markets, then Chair Powell’s words have the power to move entire economies. In my opinion, the words and actions of Powell’s Fed over the past two years have been detrimental to the global economy.
Much like many other socioeconomic phenomena we are witnessing today, this incident started with the onset of the COVID-19 pandemic in March 2020. With global financial markets already in a frenzy given the unprecedented nature of the economic shock, Powell’s Fed had to deploy monetary policy tactics that had never been deployed before, such as the direct purchasing of corporate bonds and direct lending programs. These innovative and effective policy measures garnered Powell universal praise and were instrumental in ensuring a rapid K-shaped recovery, at least for the financial sector.
However, I believe that the Fed failed to properly recognize the temporary nature of the shock. Unlike the 2007-08 financial crisis, there were no significant structural weaknesses in the U.S. economy leading up to March 2020 and, therefore, the level of monetary stimulus required to prop up the economy was much less than what was injected by the Fed.
Why do I say this? Well, firstly, after peaking in April 2020, the unemployment rate started rapidly falling leading into the summer as COVID-19 restrictions started to ease. By August 2020, the unemployment rate was back in single digits, and, as per the GDP numbers for the third quarter, the economy was officially out of the recession.
Secondly, as the Fed was loosening monetary policy on an unprecedented scale, the U.S. Government was also on a spending spree, allocating about $2.59 trillion for economic relief programs by October 2020. This fiscal stimulus was essential and helped keep up consumer spending but, when put in conjunction with the Fed’s monetary loosening, it contributed to the overheating of the economy.
As is the case with ill-planned economic policies, the effects only start to take hold after the passage of time. Unfortunately for us, the time to pay the piper has arrived. Hyper-inflated equity market bubbles have popped, with the Dow Jones recording some of its worst sessions since the panic-selling days of the pandemic. The housing market is finally coming off its high horse, much to the chagrin of homeowners who took out mortgages at a time of historically low interest rates.
And now, as the Fed attempts to react to its past blunders by raising rates at a pace not seen since the 1980s, the world has to deal with the consequences. Currencies of both developing and developed economies are tumbling in the face of the U.S. dollar, leaving countries reeling with skyrocketing inflation and on the brink of sovereign defaults.
In hindsight, these mistakes and their disastrous implications could have been avoided if Powell’s Fed had focused its attention towards responding rather than reacting. Once COVID-19 set in, the only goal the Fed seemed to have was to artificially prop up financial markets without paying heed to the long-term consequences of such actions. So next time you hear about an entire country going belly up in the next few months, don’t lay blame on some pesky politician, but on the man who controls the modern global economy, Jerome H. Powell. Thanks, Jerry, you really messed this one up.