Powell’s Needless Fed Boost for Kamala Harris Will Spike Inflation

Incompetence Meets Electoral Politics

Powell’s Needless Fed Boost for Kamala Harris Will Spike Inflation

With a whopping 50 basis point rate cut less than 50 days until the 2024 presidential election, Jerome Powell has solidified his reputation as the most political and incompetent Federal Reserve Chairman since the 1970s era of stagflation and Fed Chair Arthur Burns.  Here, Powell’s Kamala Harris-friendly bigger than anticipated cut may well give the stock market a boost in the home stretch to election day.  Yet, it will also reignite a virulent inflation and do great harm to American consumers, workers, and the U.S. economy.

The parallels between Arthur Burns and Jerome Powell offer a cautionary tale for any voter who might be swayed by the reckless dose of monetary stimulus that Powell has just needlessly inflicted.

Burns was appointed in 1970 by Richard Nixon at a time when inflationary pressures were steadily building.  These pressures were the result of Nixon’s predecessor, Lyndon Baines Johnson, refusing to choose between “guns and butter,” between expenditures on the expanding Vietnam War and LBJ’s Great Society welfare programs.  The result was a surge of Keynesian stimulus that drove the inflation rate from 1-2% annually in the early 1960s to 3.5% by 1966 and 5.5% in 1969 as Nixon took over the White House. 

When Burns took over the Fed as a Nixon appointee in 1970, he immediately began cutting rates in the face of a slowing economy and increasingly contentious presidential race.  As the 1972 election approached, and at Nixon’s urging, Burns resisted any attempt to raise rates despite a growing inflationary problem and the emergence of that rare economic phenomenon known as “stagflation” – simultaneous inflation and recession.

By the time Burns did hike rates in July of 1973, the stagflation genie was out of the bottle, and American workers would suffer one of their worst decades in its economic history.   Indeed, for the 1970s decade, and because of virulent inflation, real inflation-adjusted wages were stagnant and did not rise at all!

Fast forward now to Jerome Powell.  This is a man who has no business being Fed Chairman – he’s a lawyer, not an economist, and has no idea how monetary policy does or should work.

During the Trump administration, the incompetent Powell needlessly raised rates when conditions did not warrant the hikes.  Powell thereby shaved off at least a point of annual GDP growth from the American people and the Trump economy.

Because of this incompetence, Powell knew full well that Trump would never reappoint him if he had been re-elected in 2020.  Now, Powell is hoping for a Kamala Harris win so Trump won’t fire him.  Ergo, the Fed’s election interference in the form of a higher than expected and dangerously unnecessary 50 basis point cut.

With his egregious politicization of the Fed, and just as Arthur Burns stoked the 1970s stagflation by throwing Nixon a lifeline, Jerome Powell is well on his way to solidifying his reputation as the Fed Chair most responsible for the hyperinflation we are about to be hit again with.  And to be clear, there was no need for such a big rate cut less than 50 days before the election – it was as purely political  and pro-Harris as an ABC presidential debate. 

Indeed, as a big danger sign, there is significant signs of inflationary pressures that remain well above the Fed target.  Ergo, a 25-basis point hike– or no hike at all -- would have been far more prudent until we get further data.

And here’s the bigger long-term problem. Because of massive government over-spending by the Biden-Harris administration – Vice President Kamala Harris was the tie-breaking vote in the Senate on the two biggest budget-busting bills in decades – the U.S. faces budget deficits that will be a whopping 6% of annual GDP for the foreseeable future.

As a practical matter, this means the U.S. government will finance much of the Biden-Harris reckless spending by selling bonds to foreign investors. This, in turn, will put substantial downward pressure on the U.S. dollar.

Here, just a 6-7% weakening of the dollar will spike inflation by a full 1%.  This at a time when the Federal Reserve inflation target is supposed to be 2% and we are currently at 2.5%, well above target.

The bottom line: Jerome Powell has made a mockery of those who insist that the Federal Reserve must remain free of political pressure.  By ceding the sovereignty of the Fed to the Harris for President campaign, he has done a great disservice both to democracy and our financial system, not to mention our economy, and American workers will suffer the most.

Peter Navarro served in the Trump White House as a senior presidential advisor.  He holds a doctorate in economics from Harvard University and is author of The New MAGA Deal: The Unofficial Deplorables Guide to Donald Trump’s 2024 Platform.