Rudi Dornbusch, the late MIT economist, said of the Mexican central bank that he could understand that it made mistakes. After all, its board members were human. However, what he could not understand was how the same people could make the same mistakes time after time.

Something similar might be said of today’s Federal Reserve. By not remembering its 2021 monetary policy mistakes that led to multi-decade high inflation, the Fed now risks causing an unnecessary economic recession by making the same monetary policy mistake that it made before but in reverse.

In 2021, at a time when the economy was receiving its largest budget stimulus on record and recovering well from its 2020 Covid-induced economic recession, the Fed kept monetary policy too loose for too long. Not only did it keep interest rates at their zero-lower bound; The Fed also flooded the market with liquidity by buying $120 billion a month in Treasury bonds and mortgage-backed securities. It did so even at a time when both the equity and housing markets were on fire. Little wonder then that the economy overheated and inflation accelerated to a peak of over 9 percent by June 2022.

In 2021, one key mistake that the Fed made was forgetting that monetary policy operates with long lags. This induced it to follow a data dependent policy. Instead of anticipating that its ultra-loose monetary policy would lead to economic overheating, the Fed waited to see that inflation was clearly above its target before it began its tightening cycle. By the time it acted to regain inflation control, the inflation genie was well out of the bottle.

The Fed also made the key policy mistake to ignore Milton Friedman’s teaching that inflation is always and everywhere a monetary phenomenon. It did so even as the broad money supply increased by a cumulative 40 percent in 2020 and 2021. This was by far the fastest pace of monetary expansion in the postwar period. That should have raised red flags about the multi-decade high inflation that was in prospect for 2022.

Fast forward to today, we find that once again the Fed seems to keep forgetting that monetary policy operates with long lags. This is inducing the Fed to once again follow a data dependent policy. This time around, the Fed is saying that it will not stop raising interest rates or slow the pace of its quantitative tightening until it sees the clearest of signs that inflation is coming down to its 2 percent inflation target. Never mind that last year the Fed raised interest rates by 425 basis points, which was the fastest pace of Fed hikes in over forty years. It also engaged in quantitative tightening at the unprecedented pace of $95 billion a year. Never mind too that inflation is now decelerating at a rapid pace, the economy is slowing, and budget policy has shifted from large scale stimulus to large scale fiscal withdrawal.

Once again, the Fed seems to be ignoring – at its own peril – the dramatic recent swing in money supply growth from one of excessive expansion to one of contraction. Whereas in 2021 the broad money supply surged by over 10 percent, today it’s actually declining at its fastest since the 2008-2009 Great Economic Recession. This should be raising red flags that the Fed is now engaging in monetary policy overkill to regain inflation control. That could bring on an unnecessary recession.

With its past poor monetary policy record that led to multi-decade inflation, one might have hoped for a humbler and nimbler Fed. Instead, we have a Fed that keeps insisting that it might need to raise interest rates further and keep them high until at least 2024 to get inflation under control. It does so even when there are signs that the economy is slowing and inflation is moderating. For which reason, we might need to brace ourselves for a hard economic landing.

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