The Federal Reserve has employed a pedal to the metal monetary strategy in response to the COVID pandemic consistent with its unprecedented statement in March 2020 that it would do “whatever is necessary” to keep credit flowing through the U.S. and global financial systems. Whatever is necessary has included a smorgasbord of initiatives including cutting short-term interest rates to zero, buying $120 billion per month in U.S. Treasury and mortgaged-backed securities (Quantitative Easing), buying corporate bonds and commercial paper (short-term, corporate IOUs), a $2.3 trillion lending program and other initiatives. This was in addition to the trillions of dollars pumped into the economy through the various Congressional fiscal programs such as the CARES Act. Regardless of your political persuasion, it is hard to argue that these efforts have not been successful. 

GDP (Gross Domestic Product), a measure of our nation’s economic output, is now higher than at pre-pandemic levels. The Federal Reserve of Atlanta is estimating real growth of 9.7% annualized in 4Q21. Unemployment is 4.2%, a level many economists consider full employment, especially in our modern, mobile, Internet-connected society. There are more jobs currently available than people seeking employment. Unfortunately, all this progress comes at a cost. Inflation is now running at a 30-year high. Federal Reserve Chairman Jerome Powell and his colleagues at the FOMC (Federal Open Market Committee) have been firm in their position that inflation pressures are “transitory” and will subside as the trillions of stimulus dollars doled out to consumers and businesses alike works its way through the economy. However, during comments last week to the Senate Banking Committee, Chairman Powell threw in the towel saying it is time to retire the word transitory and possibly speed up its recently announced reduction of its monthly asset purchases. 

So here we are with a red-hot economy and a new omicron COVID strain that does not yet appear very virulent. Many experts believe the Fed is playing with fire by waiting so long to take its foot off the gas pedal and point to the current high rates of inflation as evidence. What’s causing these elevated inflation levels? No one knows for certain, but every action has an equal and opposite reaction. It is likely a combination of wage pressures, excess demand from all those dollars, and supply chain bottlenecks, which many believe is the result of the government’s financial largesse creating dis-incentives for people to return to work. It will all be sorted out over time, but for now the FOMC is walking a fine line between its dual mandate of maximum sustainable employment and stable prices. If the economy is any indicator, the FOMC succeeded with the first, but it looks like the latter may be a harder goal to attain. Stay tuned.