By now, it’s crystal clear that the Federal Reserve isn’t always right. The Fed, the most powerful economic institution in the United States or even the world, has two jobs – keep inflation under control and maximize employment. To do that, its core responsibilities include setting interest rates, managing the money supply, and regulating financial markets.

However, under the wrong leadership, the Fed could itself start an inflation and Recession. While Biden administration conveniently blames Russian Vladimir Putin for the current financial problems in the U.S. and the world, in reality, it was the United States that screwed up its own economy. And the person who had admitted that is none other than Janet Yellen.

Two weeks ago, in an interview with CNN, U.S. Treasury Secretary Janet Yellen said she was “wrong” about how severe inflation would be. She admitted her screw-up – “I think I was wrong then about the path that inflation would take”. She was referring to her remarks last year where she indicated there would only be a “small risk” of inflation, and that it would be “manageable”.

Worse, she said something that was absolutely stunning – “There have been unanticipated and large shocks to the economy that have boosted energy and food prices, and supply bottlenecks that have affected our economy badly, that I didn’t at the time ‘didn’t fully understand’. But we recognize that now the Federal Reserve is taking the steps that it needs to take.”

So, she did not fully understand the economic problem last year, yet she had irresponsibly declared that inflation would be “a small risk,” “manageable” and “not a problem” last year. Does that mean any Tom, Dick and Harry can become the U.S Treasury Secretary? Still, like President Joe Biden, Janet Yellen also conveniently blamed the Ukraine war for the impact on gas prices.

Hilariously, four days ago, Yellen said she did not expect the U.S. economy to plunge into recession even though she believe growth would definitely slow down and gasoline prices are unlikely to fall anytime soon. Can you believe the woman’s latest recession prediction after she admitted just a week earlier how terribly wrong she was about inflation?

To make matters worse, the U.S. has a weak and indecisive Federal Reserve Chairman Jerome Powell, who was supposed to have raised the interest rates last year when the acceleration of price began. But he didn’t, preferring to wait and see. Powell could not perform his job because inflation is not the problem of the Federal Reserve alone, but also the government policy makers.

For years, under pressure, the Fed had been insisting that the high inflation was temporarily in order to justify an interest rate near zero because the White House wanted to make Americans feel rich by allowing them to borrow and spend. Even before the Covid-19 pandemic, the Fed was responsible for flushing the financial markets with cheap money – about US$120 billion a month – since 2018.

Jerome Powell, speaking during a news conference on May 4 to raise interest rate by 50 basis points, has signalled that the Fed could continue to approve increases of half a percentage point. However, the hike came only after the U.S. inflation rate accelerated to 8.5% in March, after hitting 7.5% in January and 7.9% in February – the highest in 40 years.

The fact that the Fed only rushed to raise interest rate after three consecutive months of hitting highest inflation in 40 years speaks volumes about how slow, inefficient and incompetent the U.S. government has been. Even then, Powell had assured economists and investors that a hike of 75 basis points, which was last done in 1994, was off the table.

Powell’s dismissal of three-quarter point hikes was deliberately done to pacify investors and calm the stock markets, but in the process the Fed could risk prolonging the problem of inflation. When April’s inflation recorded 8.3%, many investors rush to the stock market because some half-baked economists and analysts claimed the inflation has started to cool off.

The panic starts all over again when the U.S. inflation rate unexpectedly accelerated to 8.6% in May 2022 – the highest since December 1981 and compared to market forecasts of 8.3%. Now, the bets are on the table that the Fed, under pressure, will get more aggressive at its June 14-15 meeting to cool price pressures by introducing 75 basis point hike, reversing its earlier pledge.

The latest criticism came from El-Erian, chief economic advisor at Allianz, who said the current record high inflation could have been avoided had the Federal Reserve acted earlier and shown humility after it wrongly described inflation as “transitory”. El-Erian fears that the current “stagflation” – low growth, high inflation – could see current inflation rate reach 9%.

Both Biden administration and the Federal Reserve are under tremendous pressure with ugly numbers everywhere. The average price of regular-grade gasoline in America has spiked above the US$5 level to US$5.10 per gallon as Putin was enjoying the high oil prices – Russia earned US$98 billion in 100 days during the current ongoing Ukraine war.

The prices of many foods, ranging from wheat and other grains to meat and oils, have shot up in the past few months. But with the rising cost of energy and fertilizer directly linked to Ukraine war, chances are the food prices will continue to escalate in the coming months. Food export bans like wheat from India and chicken from Malaysia will only make matters worse.

Rice could be the next staple food to be affected. The United Nations’ Food and Agriculture Organization Food Price Index already show international rice prices shooting up for the fifth straight month to reach a 12-month high. Skyrocketing wheat prices could force some countries to substitute it with rice, not to mention fertilizer costs for farming are pressuring the production of rice.

Vietnam and Thailand – world’s fifth and sixth biggest producers of rice – have started talking about increasing the price of their rice exports. Some countries have quietly increased imports of rice from India, leading to fear that the Indian government may be forced to slap an export ban on its rice to protect domestic market. Clearly, an increase in rice prices would badly affect many people in Asia.

Even soybeans, food least affected compared to wheat and corn, have seen its prices hit record, surging 30% this year alone. The contract for soybeans on the Chicago Board of Trade saw Thursday (June 9) price at US$17.69 a bushel, topping the previous high of US$17.68 recorded in September 2012. Soybeans are fed to chickens and salmon, as well as pigs and cows.

Despite Janet Yellen’s assurance that the U.S. will not enter a recession, Bloomberg research says there’s a 25% chance that a recession will hit this year, and a 75% it will happen next year. This means a recession is inevitable. The question is whether the Federal Reserve wants a long suffering or a short pain. Powell recently acknowledged that getting inflation under control could require some pain.

Therefore, Fed chairman Powell might suddenly push for a 75 basis point rate hike to deliberately trigger a recession to get it over. However, despite what experts and Treasury Secretary Janet Yellen believe, the recession could have already arrived. According to University of Michigan Index of Consumer Sentiment, the consumer sentiment has plunged to 50.2 in June.

The consumer sentiment reading of 50.2 (a decline of 14% from May’s 58.4) is the lowest in survey data going back to 1978. In fact, the current consumer sentiment is not only lower than during the outbreak of Covid-19, but is even lower than the last 1980 Great Recession. Bank of America chief investment strategist Michael Hartnett said – “We’re in technical recession, but just don’t realize it.”

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