Putin played Powell – and the US is paying the price

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It’s tempting to think that Fed Chairman Jerome Powell deserves the pickle he’s in: he ignored inflation as “transient” when it wasn’t. Now, after one of the biggest policy mistakes in recent Fed history, it needs to raise interest rates, perhaps significantly.

But the timing couldn’t be worse: a much-needed and significant rate hike would come amid global instability caused by Russia’s invasion of Ukraine, and a slowing US economy could only reinforce the hand of Vladimir Putin.

Unfortunately, there is no easy way out for Powell and the Fed, and you can bet he and his advisers are struggling with what to do. Still, don’t rejoice in Powell’s pain; it may be his fault and possibly he may be reviled for it, but it is the American people who will pay the price.

Only bad choices

This price, of course, represents all the bad choices Powell has to choose from, including doing little or nothing with rate hikes that will lead to more heartbreaking inflation and massive tax hikes on the working class. Or Powell could channel his inner hawk and possibly trigger a recession because he waited too long to do his job.

Putin is smart enough to have figured into the Powell Pickle in his calculations to invade Ukraine. Of course, President Biden’s weakness is well known and a priority for the Russian dictator who watched (as we all did) Biden’s clumsy withdrawal from Afghanistan and the daily chaos at our borders.

Biden’s odd fixation on placating his party’s progressive left has made Russia rich, and Putin sees it too. Listening to AOC types, Biden has cut oil production so much that Europe is indebted to Russian energy supplies.

Russian President Vladimir Putin speaks during his annual press conference
The US government has announced sanctions against Russian President Vladimir Putin as he continues the invasion of Ukraine.
Mikhail Svetlov/Getty Images

All of this is just catnip for an autocrat looking to expand his empire, but there’s more. Putin’s kleptocracy has made him one of the richest men in the world, bankers tell me, citing his net worth of $100 billion or more. Neither he nor his oligarch friends are overly concerned about Biden’s sanctions which strangely rule out restricting Russia’s use of the SWIFT interbank clearing system, meaning the bad guys can still move money in the event of a need.

What seals the deal for Putin in his aims for European dominance is the precarious state of the US economy. Despite some decent numbers (GDP growth and low unemployment), the Fed botched the inflationary threat and weakened the US at the worst possible time.

The Fed has the dual mandate of using monetary policy (adjust short-term interest rates and regulate the money supply by buying or selling bonds) to promote economic expansion and what we calls “stable prices”, i.e. low inflation.

A gas station marquee in Los Angeles.
Gas prices rise again as Russia invades Ukraine.
Ringo Chiu/ZUMAPRESS.com

There’s a good reason the Fed has traditionally put price stability above everything else: what good are higher wages for workers if they’re being eaten up by high food and fuel costs? energy and just about everything you need to get through the day?

For nearly two years, Powell simply ignored the second half of his term. It started with the necessary and historic money printing during the pandemic to keep markets from functioning and the economy from collapsing.

But Powell didn’t stop there. He continued to print money and even applauded Biden’s progressive spending measures that discouraged work and allowed inflation to soar. He did this when it was so obvious that inflation was not transitory and could not be explained by fixing the “supply chain”.

long-lasting problem

A trader works at the New York Stock Exchange.
The Dow Jones fell more than 500 points on February 22 when Russian troops entered Ukrainian territory.
Wang Ying/ZUMAPRESS.com

More recently, Powell has sought to put the genie back in the bottle as inflation has proven to be a real and lasting problem. It reduces its money printing and signals rate hikes and pulls money out of the economy and markets in March. But they are expected to arrive after Putin’s tanks enter Kyiv and he is ready to annex one of Europe’s greatest nations.


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The instability is frightening for investors, who explained the massive volatility of all major indexes last week. A nightmare scenario of stagflation – high inflation due to an oil boom and recession due to higher rates needed to rein in inflation – was now on the cards.

Almost as expected, a leak came on Thursday, after the Dow fell some 800 points, that the Fed could ease the severity of rate hikes at least until the Russian mess is over and the markets stabilize.

At the right time, the Dow Jones recovered, making up for all the lost ground and ending the day with nearly 100 points. Behind the scenes, big investors felt the Fed could now reverse major rate hikes because Biden’s sanctions were quite weak; oil prices will not skyrocket because Russia can continue to produce.

Since oil and therefore gas prices are a component of the inflation gauge known as the Consumer Price Index, inflation may look good on paper when the next release comes out. CPI in March, allowing Powell to roll back significant rate increases.

So the good times are here to stay? Not so fast. Powell underestimated inflation for most of the year. As the United States restarts oil production, why should oil prices fall back to a more manageable $75 a barrel from their current levels above $90? That means he may have no choice but to flirt with an economic downturn since history shows that runaway inflation is almost always a harbinger of civil unrest.

The question many investors are asking: is Powell’s legacy more threatened by the threat of inflation or is he causing a recession? I don’t know, but Putin doesn’t care, that’s why his tanks are in Kiev as you read this.

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