Three ways the Fed ‘messed up’ – UBS

With little suspense in the Fed decision Wednesday it is a good time to look back at this historic tightening cycle.

UBS Chief Economist Paul Donovan – no fan of Fed Chairman Jay Powell – is withering in his assessment.

“Looking back, there are three ways the Fed messed up since 2021,” Donovan wrote.

“First, Fed policy spin has been terrible,” he said. “The Fed was right about transitory inflation in 2021 (it was transitory), but when inflation shifted to the wartime energy shock, the Fed failed to communicate the changes properly and its reputation suffered.

“Second, the June 2022 policy errors elevated the importance of consumer price data (emphasizing fictional prices), tore up years of trust in forward guidance, and did so on the basis of a data point that was revised within days.”

“Third, the profit-led inflation wave was evident by October 2022 but the Fed was late in communicating – popular outrage only emerged in May 2023,” he added. “Fed Chair Powell could have used the platform to accelerate resistance. Unfortunately, Powell has tended to treat post-pandemic inflation as a homogenous concept, not three distinct problems (requiring three different solutions).”

“The US economy does look like it is heading for a soft landing, but for lower-income US households that landing is likely to be harder than it needs to be because of Fed policy,” Donovan said. “Unnecessary volatility and uncertainty about policy also carry a broader economic cost.”

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