This past Friday in the wake of a passionate argument being made by finance professor Jeremy Siegel that the Federal Reserve has outright neglected its responsibility to maintain an entirely even hand regarding monetary policy, Elon Musk, the CEO of Tesla and SpaceX, agreed that the recent policies stemming from the central bank make absolutely zero sense.
Policymakers for the central bank chose to raise the target federal funds rate by roughly 0.75% this past Wednesday evening which resulted in the Dow Jones Industrial Average dropping by well over 500 points. In the wake of stagnating heavily on Thursday, the index plummeted yet another 900 points by early Monday evening to reach a level of 29,300.
Initially, the Federal Reserve tied a near-zero target interest rate and made use of government bonds as a means to stimulate the economy throughout the recent lockdown-induced recession. As part of an interview that was carried out with CNBC, the professor from the United of Pennsylvania Wharton School highlighted that he was “very upset” and claimed that the sudden hawkishness from the Federal Reserve makes “absolutely no sense.”
“It’s like a pendulum. They were way too easy… through 2020, 2021,” expressed Siegel, pointing out that no members of the modern media were ready to ask Jerome Powell, the chair of the Federal Reserve, any of the hard questions throughout the most recent rate increase 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 encompasses more liquid forms of money such as checking accounts and demand deposits, went up from where it sat at $4.8 trillion to over $16,2 trillion between the periods of April 2020 and May 2020 alone, as reported by data from the Federal Reserve. This particular metric topped out at $20.7 trillion back in March of 2022 but has since started to drop back down recently.
Musk, who claimed just over three months ago that he had “a super bad feeling” concerning the economy, spoke out via social media that Siegel is “obviously correct.”
The drop back of monetary stimulus takes place just as inflation has been rising at the quickest rate it has seen in well over forty years. Price levels between August 2021 and August 2022 went up by roughly 8.3%, as reported by data made public by the Bureau of Labor Statistics, highlighting 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 have, over the past few months, made the choice to pivot toward a more aggressive tone. “Price stability is the responsibility of the Federal Reserve and serves as the bedrock of our economy,” expressed Powell as part of a speech issued this past 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.”
As part of a different interview carried out by CNBC, Siegel made the argument that Powell “should offer the American people an apology” for the “poor monetary policy” which has haunted 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 concluded. “The cause of the inflation was excessive monetary accommodation.”