Fed Finally Accepting Errors? Not Really!
Philadelphia Speech Makes Light of Past Errors
Federal Reserve Chairman Jerome Powell’s address to the National Association for Business Economics (NABE) on Tuesday in Philadelphia carried the dry title “Understanding the Fed’s Balance Sheet.” A better one might have been “Finally Accepting Fed’s Mistakes — But Not Really!”
Powell did, at long last, concede that the Federal Reserve could have ended its post-COVID bond purchases sooner than it did — in March 2022. “With the clarity of hindsight, we could have—and perhaps should have—stopped asset purchases sooner,” he said. It was a rare moment of candor, but a fleeting one. Powell quickly moved on, unwilling to dwell on what was arguably the most consequential policy misstep of his tenure.
The facts are plain: Despite an economy well on its way to recovery by mid-2021, the Fed continued to expand its balance sheet, effectively doubling it from its pre-pandemic level. The policy rate stayed near zero even as job growth was robust and supply constraints were easing. That monetary expansion poured fuel on the inflationary fire that ultimately peaked at 9.1% in June 2022. Yet Powell still frames that episode as “unexpected” — as if the laws of monetary physics had been suddenly suspended.
The title of Powell’s speech promised insight into the Fed’s balance sheet, but the substance offered little that markets didn’t already know. The central bank’s holdings remain at $6.6 trillion, still higher than before COVID both in dollar terms as well as relative to gross domestic product. Quantitative Tightening has proceeded in slow motion, constrained by the fear of destabilizing financial markets again as it already did in September 2019. Powell’s emphasis on “understanding” the balance sheet seems less about transparency and more about justification — explaining why the Fed’s experiment in easy money should not be blamed for what came next.
The key takeaway from Powell’s address was that QT will soon come to an end accompanying further reductions in interest rates. Gold told us what it thinks of this strategy — it hit a record of $4,372 per ounce on Thursday, up 63% since the start of the year.
The Chairman took credit for the central bank’s monetary management by pointing out that Quantitative Tightening had reduced the Fed’s balance sheet from 35% of GDP in mid-2022 to 22% currently. He carefully omitted to provide other important pieces of information — that it was at about 6% of GDP in late-2008 before then-Fed Chairman Ben Bernanke introduced Quantitative Easing as a “temporary” measure. Even at the start of COVID in early 2020, it was at 19% of GDP — less than now.
While it is true that the balance sheet should grow with the economy, it has actually surged relative to GDP over 17 years. Is it Powell’s intention to allow this to continue indefinitely? Or will he come up with another “explanation”, aka justification in, say 2029 or 2030?
Investors understand the signal beneath the words. The Fed, even as it raises rates, remains uneasy about shrinking its footprint in financial markets. That hesitation, more than any dot-plot or speech, tells us that the Fed’s normalization process is far from complete — and may never fully be.
Financial markets, always eager for any sign of policy leniency, chose to focus on Powell’s softer tone. Bond yields dipped briefly, and equities rallied, suggesting traders heard echoes of a more dovish Fed. But beneath that reaction lies a deeper problem — the central bank’s credibility is fragile. When markets consistently interpret cautious language as an invitation to take more risk, it suggests that policy communication has lost its anchor. Powell’s reluctance to admit the magnitude of past mistakes only reinforces that perception.
If Powell’s 2022 hesitation was costly, his more recent justification for the September 2024 rate cut may prove equally shortsighted. Then, as now, Powell argued that inflation was no longer a problem and that the greater risk lay in a “softening” labor market. It was a replay of the rationale used a year earlier — and inflation ticked higher after the decision.
I have long defended the principle of central bank independence from the Treasury and the Presidency. But independence without accountability is not strength — it is arrogance. Refusing to admit errors, or worse, redefining them as unforeseeable, undermines the Fed’s credibility and weakens the very case for its autonomy.
The public is willing to forgive mistakes made in good faith; what it resents is a refusal to acknowledge them. The Fed’s reluctance to learn from its own history — from the delayed tightening of 2021–22 to the premature easing of 2024 — risks embedding a culture of denial. And denial, as the post-pandemic experience has shown, can be far more damaging than inflation itself.
Powell’s Philadelphia speech could have been a moment for institutional humility — a recognition that even well-intentioned policymakers can err when they overestimate their control of complex forces. Instead, it became another exercise in rhetorical distancing. The Fed may finally be “understanding” its balance sheet, but it still seems unwilling to understand its own behavior.
Dr. Komal Sri-Kumar
President, Sri-Kumar Global Strategies, Inc.
Santa Monica, California
www.srikumarglobal.com
@SriKGlobal
October 18, 2025
Sri-Kumar Global Strategies, Inc. advises multinational investors and sovereign wealth funds on global risk and opportunities. Dr. Sri-Kumar is regularly featured on business TV and Radio media, and is a frequent speaker in global financial centers on major topics that affect markets and investments.
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