Lacalle: The Fed Caused High Inflation And The Current Jobs Slump

Both the recent spike in inflation and the current decline in US jobs are, in a very significant way, the fault of the Federal Reserve.

The Feds policies since 2021 reveal a nightmare “pendulum” effect:

In 2021, the largest monetary expansion in decades caused an inflationary burst that was particularly negative for wage earners and small businesses. A massive rate hike exacerbated this negative impact.

The August jobs report exposes the Feds failure to balance its mandate.The Federal Reserve did not seem to read their own beige book that warned of a widespread job market weakness for months.

The Federal Reserves Beige Book first alerted of a weak job market in April 2025 and continued to highlight the labor market challenges in May and June. The April Beige Book signalled flat economic activity and slow labor demand and highlighted weakness for new entrants such as graduates, with some regions noting slight declines in employment and business activity. However, despite the evident negative impact of high rates, the Fed decided to keep interest rates unchanged even when inflationary pressures proved to be nonexistent. Between April and July, CPI inflation and core CPI monthly figures showed no inflationary pressures from tariffs.

Only 22,000 jobs were created in August. Although the headline shows the weakest number since the pandemic recovery began, we must also consider that the figure includes a reduction in government jobs of 15,000. Reducing government jobs is essential for economic recovery, and in 2025, we experienced a cut of 97,000 jobs, while the period from 2021 to 2024 saw monthly increases of 50,000 government jobs. The unemployment rate increased to 4.3%, which is a small rise compared to Canada‘s 6.9% and the euro area’s 6.2%, but it is concerning because this increase was unnecessary.

The private sector—the real engine of growth—is bearing the brunt of high interest rates.

Claudio Borio of the BIS, as well as Congdon and Castaneda, have proven that the explosion of inflation from 2021 to 2023 was clearly tied to unprecedented monetary growth driven by government spending and Fed easing. The Feds loose policy, with ultra-low rates and trillions in asset purchases, led to a surge in the money supply far outpacing real economic activity. As Borio has shown, in high-inflation environments, there is a clear link between rapid money supply growth and price spikes. The key driver of the inflation burst came not from supply chain issues but from massive, coordinated monetary expansion and deficit monetisation.

Once inflation took hold, the Fed responded with rapid and significant rate hikes, pushing interest rates well above the estimated “neutral” rate. Studies show that for every 100-basis-point increase above the neutral rate, job growth among small and medium enterprises (SMEs) falls by 0.5 to 1.5 percentage points. SMEs, which lack the market power of large firms, are especially vulnerable: higher borrowing costs force many to freeze hiring, lay off workers, or even shut down. High rates have resulted in the loss of tens of thousands of SME jobs over the past year. The government remained unaffected by inflation and rate hikes. The Biden administration continued to increase government spending, the deficit, and public sector jobs while small and medium-sized enterprises (SMEs) were experiencing the dual negative effects of inflation and interest rate hikes. This was a clear case of crowding out of the private sector.

For families, high rates drive up mortgage, credit card, and car loan payments, squeezing a large proportion of US households who rely on borrowing for everyday needs. Consumption, which makes up 70% of US GDP, has visibly suffered as real disposable incomes have failed to keep pace with higher prices and debt service costs.

Double Shock: How the Fed Made the Jobs Slump

By acting too late against inflation and then maintaining overly restrictive rates even as the labor market slowed, the Fed has delivered a “double shock” to working Americans.

The entire burden of monetary correction was placed on the private sector. Rather than creating a smooth transition, the Fed shifted the burden of addressing inflation onto households and small and medium-sized enterprises.With real wage gains evaporated by high interest expenses and job creation weakening, the policy response continues to weigh on the very sectors most vital for broad-based prosperity.

The story of US monetary policy since 2021 is a sequence of brutal errors. First, the Fed stoked the inflation fire with excessive liquidity; now, it risks deepening the jobs crisis by keeping rates unnecessarily high.

The consequences are clear: destroyed SME jobs, weaker family finances, and an economy stuck in a cycle of uncertainty and lost opportunity.

Thankfully, supply-side policies, tax cuts, and deregulation are keeping the economy alive. It is time for the Fed to stop hurting Americans.