US Federal Reserve Chairman Jerome Powell’s speech to the National Association for Business Economics last week was billed as a technical discussion about “understanding the Fed’s balance sheet.” To Dr Komal Sri-Kumar, however, it was something else entirely—an admission of error disguised as a policy lecture.
“Powell did, at long last, concede that the Federal Reserve could have ended its post-COVID bond purchases sooner than it did,” says Dr Sri-Kumar, President of Sri-Kumar Global Strategies. “It was a rare moment of candour, but a fleeting one. He moved on quickly, unwilling to dwell on what was arguably the most consequential policy misstep of his tenure.”
The Fed’s post-pandemic policies have long been criticised for fuelling inflation by keeping rates near zero while doubling the balance sheet, even as the economy recovered. Inflation eventually peaked at 9.1% in June 2022, the highest in four decades. Powell has since described that episode as “unexpected,” a characterisation Dr Sri-Kumar finds hard to accept. “It’s as if the laws of monetary physics had been suddenly suspended,” he says.
The Fed’s balance sheet remains vast, at around $6.6 trillion, still above pre-COVID levels both in nominal terms and as a share of GDP. Quantitative Tightening, intended to shrink this footprint, has proceeded cautiously. Powell highlighted the reduction from 35% of GDP in 2022 to 22% now, but, as Dr Sri-Kumar notes, “He omitted the full picture. The Fed’s balance sheet was around 6% of GDP in late 2008 before Bernanke introduced Quantitative Easing as a ‘temporary’ measure. Even at the start of COVID, it was under 19%. The long-term trend is one of permanent expansion.”
That reluctance to unwind the Fed’s presence in financial markets has broader implications. “The central bank seems uncomfortable with the idea of shrinking its footprint,” says Dr Sri-Kumar. “That hesitation tells us that policy normalisation is far from complete and may never fully be.”
Markets, ever eager for signs of leniency, took Powell’s tone as dovish. Bond yields dipped, and equities rallied. Gold, meanwhile, surged to a record $4,372 per ounce, up 63% since the start of the year. To Dr Sri-Kumar, that market reaction speaks volumes. “When traders interpret caution as an invitation to take risk, it shows that policy communication has lost its anchor,” he says.
Beyond communication, the deeper issue is accountability. “Independence without accountability is not strength, it is arrogance,” he writes. “Refusing to admit errors, or redefining them as unforeseeable, weakens the Fed’s credibility and undermines its autonomy.”
For Dr Sri-Kumar, Powell’s Philadelphia address could have been a moment for institutional humility, a recognition that even well-intentioned policymakers can misjudge the forces they are trying to manage. Instead, it became an exercise in self-justification. “The Fed may finally be understanding its balance sheet,” he concludes, “but it still seems unwilling to understand its own behaviour.”
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