After finance professor Jeremy Siegel passionately argued on Friday that the Federal Reserve has neglected to maintain an even hand with monetary policy, Tesla and SpaceX CEO Elon Musk concurred that the central bank’s policies do not make sense.
Policymakers at the central bank increased the target federal funds rate by 0.75% on Wednesday afternoon, sending the Dow Jones Industrial Average tumbling more than 500 points. After stagnating on Thursday, the index fell another 900 points by early Monday afternoon to reach 29,300.
The Federal Reserve had initially pegged a near-zero target interest rate and acquired government bonds in order to stimulate the economy during the lockdown-induced recession. During an interview with CNBC, the University of Pennsylvania Wharton School professor acknowledged he was “very upset” and said the Federal Reserve’s sudden hawkishness makes “absolutely no sense.”
“It’s like a pendulum. They were way too easy… through 2020, 2021,” Siegel said, observing that no members of the media were willing to ask Federal Reserve Chair Jerome Powell tough questions during the most recent rate hike announcement. “And now… ‘We’re going to be real tough guys until we crush the economy’ … Poor monetary policy would be an understatement.”
The M1 money supply, which includes liquid forms of money such as demand deposits and checking accounts, rose from $4.8 trillion to $16.2 trillion between April 2020 and May 2020 alone, according to data from the Federal Reserve. The metric peaked at $20.7 trillion in March 2022 and has since fallen slightly.
The rollback of the monetary stimulus occurs as inflation rises at the fastest rate in four decades. Price levels between August 2021 and August 2022 rose 8.3%, according to data from the Bureau of Labor Statistics, marking a slight moderation from an 8.5% year-over-year increase in July and a 9.1% year-over-year increase in June.
Central bankers, who also increased interest rate targets by 0.75% in June and July, have indeed pivoted in recent months toward an aggressive tone. “Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy,” Powell asserted at a speech last month. “Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of strong labor market conditions that benefit all.”
During a separate CNBC interview, Siegel argued that Powell “should offer the American people an apology” for the “poor monetary policy” which marked the past few years. “It seems to me wrong for Powell to say we’re going to crush wage increases, we’re going to crush the worker, when that is not the cause of the inflation,” he said. “The cause of the inflation was excessive monetary accommodation.”
A relative bright spot in an otherwise bleak economic landscape has been the labor market, which is maintaining unemployment rates well below historic norms. Yet joblessness rose last month to 3.7% even as more Americans returned to work, according to a release from the Bureau of Labor Statistics.