Fed Interest Rate and QE Policy Mistakes in Pictures and Silly Fed Comments

Janet Yellen “Inflation before the pandemic was too low rather than too high.”

The Fed’s big mistake repeated and then doubled down was not considering asset prices, especially home prices in interest rate policy.

When you are clueless about inflation you cannot possibly get policy right. The tendency is to overshoot in both directions creating asset bubbles of increasing amplitude over time.

Period 2000-2007

The Fed, in the wake of the 2001 dot-com bubble crash (a bubble fueled by inept Greenspan policy and nonsensical fears of a Y2K issue), held interest rates too low, too long.

A housing bubble ensued, with home prices rising 85.2 percent in 7 years. Things looked benign to the Fed because its preferred measure of inflation, the PCE, was only up 16.4 percent.

Bernanke October 27, 2005: There’s no housing bubble to go bust

Bernanke March 26, 2012: Fed didn’t cause housing bubble “The decline in house prices by itself was not obviously a major threat.”

Period 2012-2019

In this period, PCE was only up 10.6 percent. But home prices were again raging, up 57.5 percent.

Housing prices bottomed in 2012. That was a clear sign the Fed should step back from loose policy and QE. Instead, the Fed oblivious, worse actually, because the Fed accelerated QE.

December 13, 2017: Yellen’s only regret as Fed chair: Low inflation The Fed’s failure to bring inflation up to its 2 percent mandate is Yellen’s single disappointment.

“We have a 2 percent symmetric inflation objective. For a number of years now, inflation has been running under 2 percent, and I consider it an important priority to make sure that inflation doesn’t chronically undershoot our 2 percent objective,” said Yellen.

10.6 percent total inflation in 7 years is well under the Fed’s 2.0 percent inflation, per year, compounded for 7 years.

Meanwhile, inflation expectations were near or over 3.0 percent for the entire period, proving how useless expectations are.

For a chart showing inflation expectation vs reality, please see How Do Inflation Expectations Impact Wages and Future Consumer Inflation?

The median point projection one year ahead is a real hoot. If anything, inflation projections are a lagging indicator, catching up to what consumers have seen and predicting more of it.

On August 27, 2020, Powell announces new Fed approach to inflation

In a move that Chairman Jerome Powell called a “robust updating” of Fed policy, the central bank formally agreed to a policy of “average inflation targeting.” That means it will allow inflation to run “moderately” above the Fed’s 2% goal “for some time” following periods when it has run below that objective.

“Many find it counterintuitive that the Fed would want to push up inflation,” Powell said in prepared remarks. “However, inflation that is persistently too low can pose serious risks to the economy.”

Over the years, fundamental changes in the economy, such as demographics and technology, have shifted the Fed’s focus to inflation that has run too low.

The situation, Powell said, “can lead to an unwelcome fall in longer-term inflation expectations, which, in turn, can pull actual inflation even lower, resulting in an adverse cycle of ever-lower inflation and inflation expectations.” 

While Powell did not specify how much higher he’d like to see inflation run, Dallas Fed President Robert Kaplan later in the day told CNBC that he would be content with a range around 2.25%-2.5%.

Powell is every bit the idiot that Yellen was, Bernanke before Yellen, and Greenspan before Bernanke.

Period 2020-2025

Clearly the Fed made up for lack of prior inflation, and then some. Somehow, they all forgot to take a bow for making up for past too lowness.

In this period, the PCE soared 21.2 percent, the CPI 23.6 percent, and housing another 52.2 percent.

Hello Jerome Powell. Where is your statement now on your “robust updating” and agreement to a new policy of “average inflation targeting.”

It seems to me that we need a period of below 2.0 percent inflation to make up for your overshooting, which by the way, not a single one of you foresaw.

Former Fed Chair, but then current Treasury Secretary Janet Yellen had this amusing comment.

On March 8, 2021, Bloomberg reported Yellen Says Stimulus Unlikely to Cause Inflation Problem

Treasury Secretary Janet Yellen dismissed fears that President Joe Biden’s $1.9 trillion pandemic-relief bill is so big that it will cause an inflation problem, as she seeks to push the recovery deeper into the U.S. labor market to address long-standing economic disparities.

She has repeatedly rejected concerns that Biden’s stimulus is excessive given the economy’s signs of recovery, and that run-away inflation could damage the economy.

“I really don’t think that’s going to happen,” she said Monday on MSNBC. Inflation before the pandemic “was too low rather than too high,” she noted. “If it turns out to be inflationary, there are tools to deal with that,” she said of the stimulus package.

On June 22, 2021, the AP reported Fed’s Powell says high inflation temporary, will ‘wane’

“The incoming data are very much consistent with the view that these are factors that will wane over time and then inflation will then move down toward our goals.”

Also on Monday, New York Federal Reserve Bank President John Williams, who also serves as vice chair of the Fed’s policymaking committee, said that currently high inflation is likely transitory.

“I expect that as price reversals and short-run imbalances from the economy reopening play out, inflation will come down from around 3% this year to close to 2% next year and in 2023,” Williams said.

Trained Economic Idiots

One might think that the Fed might have been able to figure out that record fiscal stimulus on top of record and ongoing QE would do to inflation, but one would be wrong.

I suspect the IQs of Bernanke, Powell, Yellen, and Greenspan are very high. But not a one of them has any common sense, and they all believe in disproved economic nonsense like Phillip’s Curve and inflation expectations.

Up and down the line, everyone one of these Fed Chairs is a trained economic idiot.

Bernanke, Greenspan, and Powell all missed obvious economic bubbles. Not a one of them understand that asset bubbles are the problem, not low inflation.

Compounding the problem, these economic jackasses do not have any idea how to measure inflation.

The Fed Uncertainty Principle

Please consider The Fed Uncertainty Principle written April 3, 2008 before the collapse of Lehman Brothers and Bear Stearns.

Does the Fed Follows the Market?

Most think the Fed follows market expectations.

However, this creates what would appear at first glance to be a major paradox: If the Fed is simply following market expectations, can the Fed be to blame for the consequences? More pointedly, why isn’t the market to blame if the Fed is simply following market expectations?

This is a very interesting theoretical question. While it’s true the Fed typically only does what is expected, those expectations become distorted over time by observations of Fed actions.

If market participants expect the Fed to cut rates when economic stress occurs, they will take positions based on those expectations. These expectation cycles can be self-reinforcing.

The Observer Affects The Observed

The Fed, in conjunction with all the players watching the Fed, distorts the economic picture. I liken this to Heisenberg’s Uncertainty Principle where observation of a subatomic particle changes the ability to measure it accurately.

The Fed, by its very existence, alters the economic horizon. Compounding the problem are all the eyes on the Fed attempting to game the system.

A good example of this is the 1% Fed Funds Rate in 2003-2004. It is highly doubtful the market on its own accord would have reduced interest rates to 1% or held them there for long if it did.

What happened in 2002-2004 was an observer/participant feedback loop that continued even after the recession had ended. The Fed held rates rates too low too long. This spawned the biggest housing bubble in history. The Greenspan Fed compounded the problem by endorsing derivatives and ARMs at the worst possible moment.

In a free market it would be highly unlikely to get a yield curve that is as steep as the one in 2003 or as steep as it was just weeks ago when short term treasuries traded down to .21%.

The Fed has so distorted the economic picture by its very existence that it is fatally flawed logic to suggest the Fed is simply following the market therefore the market is to blame. There would not be a Fed in a free market, and by implication there would be no observer/participant feedback loop.

Fed Uncertainty Principle: The fed, by its very existence, has completely distorted the market via self-reinforcing observer/participant feedback loops. Thus, it is fatally flawed logic to suggest the Fed is simply following the market, therefore the market is to blame for the Fed’s actions. There would not be a Fed in a free market, and by implication, there would not be observer/participant feedback loops either.

Corollary Number One: The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn’t know (much more than it wants to admit), particularly in times of economic stress.

Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.

Corollary Number Three: Don’t expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.

Corollary Number Four: The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it’s easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.

The Fed Uncertainty Principle is still my all-time favorite post.

BIS Deflation Study

The BIS did a historical study and found routine price deflation was not any problem at all.

“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.

For a discussion of the BIS study, please see Historical Perspective on CPI Deflations

Asset Bubble Deflation

It’s asset bubble deflation that is damaging. When asset bubbles burst, debt deflation results.

Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive build up of unproductive debt and asset bubbles that eventually collapse.

The problem is not deflation, it’s the Fed’s misguided attempts to prevent it.

Transitory Makes a Comeback

On March 29, 2025, I noted Fed Chair Jerome Powell Revives the Words “Transitory Inflation”

Please note Powell revived from the dead, the word “Transitory”.

Powell has two chances to be right. The first is transitory happens and we all live happily forever more.

The second way is Trump’s tariffs and other economic policies crash the markets bringing asset price deflation in a big recession coupled with crashing interest rates.

Alternatively, we could have a huge bout of stagflation with Powell looking like a fool for reviving the word.

Related Posts

March 27, 2025: Second Massive Wave of Imports Shows More Tariff Front Running

The advance import-export data for February is another doozie. Three charts.

March 27, 2025: Over 9 Million Student Loan Borrowers Could See their Credit Scores Tank

The student loan debacle is about to hit the crisis stage. Who’s to blame?

March 27, 2025: US Debt Will Grow to a Staggering 156 Percent of GDP by 2055

If Congress extends the TCJA tax cuts with no offsetting savings, the deficits will surge.

For more discussion of the silliness of inflation expectations, please see Consumer Sentiment Dives to Lowest Level Since 2022 as Inflation Expectations Jump

The one place expectations do matter is in asset bubbles, and it’s the only place the Fed doesn’t look!

The risk of debt deflation and an asset price collapse is very real. Trump policies, especially tariffs, compounds that risk.