Exhilarated by chasing Trump out of office, the victorious Democrats celebrated their control of legislative and executive power by offering an excessive and manifestly unaffordable fiscal stimulus, financed by an even more extravagant “free money” policy.

Predictably, early signs of rising costs in tightening labor markets were blissfully ignored. And so was the relentless flareup of the carefully trimmed PCE (personal consumption expenditure) index since the second quarter of 2020. That officially targeted inflation indicator ended up at an annual rate of 6.3% in the first quarter of this year.

Determined to keep the party going, the Democrats also invented a new concept of a “transitory and reversible” price inflation. That arrant nonsense was swallowed whole by asset traders and the Washington’s compliant and clueless European followers.

And when it became obvious that the soaring inflation was neither “transitory” nor “reversible,” the looming debacle of an inevitably long period of a sinking economy, with huge jobs and income losses, was blamed on the four-months old war in Ukraine.

But that story did not sell either.

So, as it always happens, at some point policy errors and their culprits are clearly identified. Unsurprisingly, the U.S. Federal Reserve (the Fed) is now criticized by Democrats’ leading analysts for failing to act in a timely manner to prevent a deterioration of price stability – that can only be stopped and reversed at a price of a long and deep recession.

The Fed is a convenient scapegoat

A huge hypocrisy, isn’t it: The Fed is now the whipping boy taken to task for going along with the official policy line that no monetary tightening was necessary -- because the U.S. inflation was just a benign “transitory and reversible” event.

That is an interesting moment for pause and reflection to those of you who need reassurance about the central banks’ policy independence.

The more important question, however, is this: Why was it necessary to stall the Fed’s interest rate increases by an obviously false “transitory and reversible” inflation argument?

The answer is simple. Had the Fed acted decisively in the spring of last year, when its inflation policy target (PCE) marked a quarterly jump to 3.4%, the U.S. economy would now be in a deepening recession.  And that, of course, would have been unacceptable to the Democrats facing a mid-term Congressional election next November.

Remember, losing the control of Congress means handing to Republicans the legislative agenda in the run-up to presidential elections in November 2024.

The Fed, therefore, did nothing. It continued its zero-interest rate policy, which meant that a key monetary policy rate, adjusted for inflation, was minus 3.4%, with all other real interest rates, along the entire yield curve, in the negative territory.

A relatively mild process of interest rate tightening has been initiated since the beginning of this year, but the Fed’s real (i.e., inflation adjusted) policy interest rate is still -6.8%, if the 9.1% consumer price index for June is used as a deflator. Using the Fed’s PCE of 6.3% reported for last May, the real policy rate is still -4%.

U.S. should focus on pressing domestic issues

The Fed, therefore, has a long way to go just to get to the neutral monetary policy – a position represented by the real policy rate of +2%.

But how far, and at what pace, the Fed will go from here is anybody’s guess. One thing is certain, though: Reaching the Fed’s PCE inflation target of about 2% is out of the question during the election cycle ending in November 2024.

Another certainty is the U.S. recession. That’s indicated, among other things, by the inverted yield curve of the U.S. Treasury’s debt instruments. With only one exception, such a yield curve inversion has been a good predictor of an impending economic downturn since 1955.

It’s a pity things turned out that way. Democrats should have left the Fed to do its job of keeping inflation within reasonable bounds during this election cycle. They could have also helped to hold inflation down by releasing additional supplies from America’s huge energy reserves. Extracting a Saudi Arabian promise last week of pumping 13 million b/d comes too late to change the present energy-driven inflation dynamics.

The U.S. inflation is now a broadening phenomenon, with nominal wages and unit labor costs soaring at annual rates of 8.1% and 8.3% respectively during the first quarter of this year. Killing such a wage-price spiral is a job of deep recession.

This unfolding U.S. inflation experience shows that Washington would do well by adopting more selective sanctions policies that leave out necessities, such as food and energy, from measures of global trade limitations. And, above all, the hardships caused by the incipient recession will underscore the need to focus on domestic issues to improve economic and social welfare, and to narrow the widening divisions of American society.