Honestly, it's great that Fed Chairman Powell is catching up with the real world enough to admit he's been misusing the word transitory for months now. But it's not his choice of language that's the problem…
One thing is certain, inflation is no longer officially “transitory.”
For months, recently reappointed Federal Reserve Chairman Jerome Powell kept telling the public that rising inflation was transitory, and would soon subside.
It hasn’t, and isn’t likely to in the near future either. So the next natural question to think about is: What now, Chairman Powell?
With four major pivots in monetary policy over a short three years, according to CNBC, both Powell and the Fed he leads seem confused about what to do next:
At its two-day meeting next week, the Fed is expected to say it will double the pace of its bond purchase taper, while also likely hinting at more aggressive interest rate hikes coming in 2022. The moves are coming in response to inflation that is stronger and longer-lasting than Fed officials had anticipated.
But [Joseph] LaVorgna worries that the Fed, after months of calling inflation “transitory,” is now making the mistake of overestimating its duration and tightening at the wrong time. That could necessitate officials again having to change back next year, if the current inflation trend runs out of steam. [emphasis added]
Powell’s remarks revealed his confusion about the economy, and why he chose the word “transitory” in the first place:
“We tend to use it to mean that it won’t leave a permanent mark in the form of higher inflation,” he told the Senate Committee. “I think it’s probably a good time to retire that word and try to explain more clearly what we mean.”
That might have been a good idea for Powell a few months ago, when he kept using the word transitory to dismiss steep, across-the-board price surges on virtually every category of goods and services. For months now, his strategy to fight inflation was to have his hands and say transitory as though it was a magic word.
Honestly, it's great that he's catching up with the real world enough to admit he's been misusing the word transitory for months now.
But it's not Powell's choice of language that's the problem.
Our spending power has been plummeting since January 2021 and shows no signs of slowing down all by itself.
Powell and the Fed are out of easy answers. That means only tough decisions are left.
Leaving aside the Ron Paul solution of simply shutting down the Federal Reserve, Powell really only has one tool that can get inflation under control.
But it's a doozy…
The Hail Mary play: Powell could find the guts to invoke the Volcker Plan
In football, when there are only a few seconds left in the 4th quarter, if the team with the ball is behind by less than a touchdown… they throw a long pass into the end zone called a “Hail Mary.” If a receiver manages to get his hands on the ball, it’s a dramatic, last-second victory.
If not, well, the team loses the game.
After more than a decade of interventions, and running out of options to maintain any semblance of a normal, healthy economy, Powell’s Fed might have to consider its own last-ditch effort.
Powell's own “Hail Mary” would most likely resurrect a controversial monetary policy known as the Volcker Plan.
The “rule” came about in the 1980s amidst out-of-control inflation when former Fed chairman Paul Volcker tried a controversial economic strategy. He employed extremely high interest rates (over 20%) to combat the issue.
That's strong medicine. The result was a two-year recession and, as you'd expect, public outrage:
Volcker's Federal Reserve board elicited the strongest political attacks and most widespread protests in the history of the Federal Reserve (unlike any protests experienced since 1922), due to the effects of high interest rates on the construction, farming, and industrial sectors, culminating in indebted farmers driving their tractors onto C Street NW in Washington, D.C. and blockading the Eccles Building.
Higher interest rates also meant an end to deficit spending, simply because the U.S. would pay ruinous rates to finance its debt. Congress was forced to take steps toward fiscal restraint.
In other words, Volcker implemented exactly the opposite policies Powell's Fed has. Volcker raised interest rates, contracted the money supply and discouraged government spending.
The result? The Volcker Plan worked.
The Powell Plan? Well, let's see…
According to the latest inflation report, gasoline prices have gone up 58% year-over-year. Food, up 6%. Overall inflation is at 6.8%, the highest since 1982 (when Volcker had Powell's job).
Here's the problem: Powell is no Volcker. When Volcker cranked interest rates sky-high, Wall Street howled. Everyone in debt absolutely hated Volcker. He didn't blink. He stuck to his plan, ignored the outrage, and he solved the problem.
Powell knows this. He's not stupid. He's simply unwilling to do what it takes to solve the inflation problem. Instead, he's doing the opposite:
- Keeping interest rates a whisker away from zero
- Increasing the money supply
- Encouraging government deficit spending (by "buying" Treasury bonds)
The Volcker Plan worked. That's a fact of history.
The Powell Plan is not working. Even so, Powell seems committed, and the Fed is staying the course -- the opposite course -- every day taking America farther and farther away from a proven solution.
At some point, Powell may pivot yet again and try his own version of the Volcker Plan. How long will he wait? How much worse will inflation get before he tries something else?
And in the meantime, every day that goes by without a solution based on real economic fundamentals? That means more financial hardship for everyday Americans.
We simply can't wait for Powell to figure this out. Instead, we should take our economic security into our own hands.
Don't let the Powell Plan wreck your savings
The Federal Reserve’s track record of interventions in the economy over the last decade plus just isn’t encouraging. One intervention seems to encourage the next, and the next...
Powell's pivots are perilously similar to panicked thrashing. He may be in over his head. There's simply no telling how long he'll keep playing word games rather than tackling the actual economic situation with a proven-to-work plan. (We can't count on it.)
The bottom line is, you should consider whether or not to stage an intervention in your own financial plan. When inflation blazes hot and bright, paper assets sometimes burn to ashes. Physical precious metals like gold and silver don't burn, no matter how hot inflation gets (and even if they melt, they're worth about the same).
We don't know how long it will be before Powell's confusion creates a calamity. Every day you wait means a portion of your purchasing power goes up in smoke.
Peter Reagan is a financial market strategist at Birch Gold Group. As the Precious Metal IRA Specialists, Birch Gold helps Americans protect their retirement savings with physical gold and silver. Based in the Los Angeles area, the company has been in business since 2003. It has an A+ Rating with the BBB and hundreds of satisfied customer reviews.
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