Federal Reserve Misfeasance

Today, the Federal Reserve Chairman, Jerome Powell, put his unfounded fear of the future ahead of actual data by not reducing the Interest Rate.

In the past, the Federal Reserve Bank Chairman has always been a professional Economist.

They professed to rely on actual economic data to make decisions on Interest Rates and Money Supply that control Inflation and support Employment Rates.

Jerome Powell is a lawyer, not an Economist.

He has ignored Actual Data and decided to use his Predictions of the Future to manage Interest Rates.

That is a Major Mistake.

Compare this Actual Data to the Current Situation:

Over the last 45 years, there have been only 5 years with an average CPI inflation rate of 2%, or less.  (Two of those years under Trump’s first term).

Yet the current Federal Reserve has set a target inflation rate of 2%.

Is this realistic ?  No:

The Average of annual Inflation rates over the last 45 years is 3.6%.

So why has the Fed chosen 2% as a Target – there is no clear rationale for it.

History of Fed Reserve Rates over last 45 Years vs. Inflation:

The Fed Reserve has an Average Rate of 4.8% versus an Inflation average of 3.6%.

The Differential is a Fed Rate historically running 1.2% higher than the Inflation rate.

That is a benchmark number for the average. 

Of course, situations and economic conditions vary over time.  In times of high inflation, the Fed Rate needs to have higher Interest, and the Differential between Fed Rates and Inflation grows.

The current inflation rate is 2.7%.  That is 25% less than the long term average of 3.6%.

Today, the Fed Differential is 1.8% with Inflation at 2.7%.  It should be no more than 1.2%.

History of Fed Reserve Rates over last 45 Years vs. 2 Year Treasury Notes:

The Differential of the last 45 years is a Fed Rate generally running 0.25% higher than 2 Year Treasury Notes.

Today, the Differential is reversed at  0.64% lower for 2 Year Treasury Notes.

That says the Bond market believes in lower interest rates.

The following chart shows the Comparison of Federal Reserve performance versus Inflation rates and Two Year Treasury Notes since 2010:

Analysis of Chart:

The chart demonstrates poor performance by the Federal Reserve under Powell.

Overreacted with low Rates during the Covid downturn igniting the highest inflation in 45 years.

• Slow to respond to adjust interest rates higher to account for high inflation.

  
  

• Now slow to respond to normal inflation rate by keeping rates high.  See the area on the chart designated as Over Restrictive.

Current Situation:

There is easy justification to reduce Fed Rates by up to 0.75%.

Inflation has been taming and falling.

We have Powell with a history of poor performance standing in the way of lower rates.

This is a high cost for the Economy and Consumers.

 A reduction would also help reduce interest costs for the Federal Government on the National Debt.

He cannot be removed without cause under current law.

He will be under continued pressure to reduce rates.  Watch the coming Congressional Hearings.

Please refer to earlier Cogport posts about Reform Proposals for the Federal Reserve.

David Hollaender                                          July 30, 2025

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