In the original 2001 movie, when Shrek and Donkey approach Lord Farquaad's castle, they find themselves in the kingdom of Duloc, a meticulously clean and highly ordered city-state. The iconic Duloc Castle, home to Lord Farquaad, towers over the rest of the city, as you can see below.
Source: Reddit
Upon entering Duloc, Shrek and Donkey encounter the unsettlingly cheerful Duloc Dolls, who sing a welcoming song. Shrek, known for his cynical humor, comments on the castle's immense size by saying, "Do you think maybe he's compensating for something?" This has a double meaning. The meaning, obvious even to children, is that the castle is very tall, but Lord Farquaad is short, so he's compensating for his lack of height. We will leave the other meeting for non-PG-rated blog posts.
Source: Reddit
For those of you who are unfamiliar with the scene, and Shrek’s obvious knocks at both Lord Farquaad and Walt Disney World, a YouTube link to the 2-minute scene is included below for your amusement and humor.
Like Lord Farquaad, Jay Powell and the rest of his Federal Reserve Bank colleagues appear to be “compensating” for the poor decisions and timing of their actions during the inflation spike that occurred after the COVID-19 pandemic. The U.S. government and the Federal Reserve Bank provided trillions of dollars in stimulus to combat the economic impact of COVID-19. The Federal government's stimulus, primarily through the CARES Act and subsequent packages of both the Trump and Biden administrations, totaled approximately $5 trillion. Beyond this, the Inflation Reduction Act of 2022 added roughly $750 billion in spending and tax breaks, while the CHIPS and Science Act authorized an additional $280 billion of spending.
Additionally, the Federal Reserve's actions, including lowering interest rates and purchasing assets, totaled approximately $4.6 trillion. This led the M2 money supply to experience a significant surge, growing by approximately 27% between 2020 and 2021. This unprecedented increase was primarily driven by government stimulus measures implemented to counter the economic impact of the pandemic. While the stimulus aimed to mitigate the economic downturn, the rapid increase in the money supply also contributed to inflationary pressures in the economy.
Nobel Prize-winning economist Milton Friedman famously stated that "Inflation is always and everywhere a monetary phenomenon." He argued that inflation, or a sustained increase in the general price level, is primarily caused by an excessive rise in the money supply relative to the growth of the economy's output. Essentially, Friedman believed that too much money chasing too few goods leads to rising prices. However, despite inflation rising rapidly beginning in mid-2021, the Federal Reserve backed the Biden administration and Treasury Secretary Janet Yellen's claim that inflation was transitory until later that year.
It is interesting to note that Jay Powell was up for re-nomination as Federal Reserve Bank Chairman in 2021. Once he was re-nominated and had job security, he started singing a different tune during congressional testimony that November. Despite telling Congress that inflation was “persistent and rising” (as shown in the chart below from the St. Louis Fed) and that the Fed would eventually have to take action against these unwelcome price increases, the Fed waited until March 2022 to initiate its interest rate increase campaign.
By June 2022, the Consumer Price Index had increased by 9.1% over the past 12 months. This was the largest 12-month increase since November 1981. In the summer of 2022, the Fed had to start “compensating” for its delay in taking action against rising prices. Subsequently, with the Fed clearly having egg on its face, it had to raise interest rates by .75% for four consecutive meetings. This was the fastest interest rate increase in nearly 40 years. The effect of these rapid interest rate increases is still being felt throughout the economy today, particularly among those with credit card debt, home equity lines of credit, or those looking to purchase new cars or homes.
In 2023 and 2024, the Fed faced intense public and media scrutiny for labeling the post-pandemic surge in inflation as “transitory.” Critics argued that the Fed’s failure to anticipate the persistence and severity of rising prices undermined its credibility. Despite the elevated levels of total economic stimulus, inflation and economic growth have subsided as the economy continues normalizing. With recency bias replaying the transitory mistake over and over in the Fed's psyche, they may once again be waiting too long to act by lowering interest rates, despite evidence of a softening economy, lower inflation, and initial softness in the jobs market.
Let's look at recent history to see what has changed in the Fed’s outlook and interpretation of economic data. In 2019, they viewed trade policy uncertainty as a drag on growth, due to deflationary pressures resulting from demand destruction caused by President Trump's trade and tariff war with China. They began cutting rates in July of 2019, citing weak foreign growth (particularly in China and the euro area). Over the next four months, they reduced rates by a total of 75 basis points and resumed quantitative easing.
However, on June 18, 2025, Fed Chair Jerome Powell expressed concern that rising tariffs could reignite inflation. With trade policy becoming increasingly protectionist, particularly toward China and Mexico, the Fed is concerned that tariffs could lead to higher import prices and, consequently, overall inflation. However, there’s an important distinction: inflation data from the last four months has shown no measurable impact from recent tariff actions. Tariffs are designed to increase the cost of foreign goods. However, supply chains and pricing are far more flexible in today’s globalized economy. If importers can shift production to tariff-free countries, renegotiate supplier contracts, or absorb costs to maintain their market share, the inflationary effects of tariffs can be mitigated or even eliminated. It appears that many are already doing this.
First Trust Chief Economist Brian Wesbury has clearly stated that the reason higher tariffs have not resulted in higher inflation is that there has not been a commensurate surge in M2 money supply from the Federal Reserve Bank. Therefore, while prices on some items may increase due to tariffs, it leaves consumers with less money to spend on other items, resulting in a neutral impact on inflation readings. Meanwhile, job growth has slowed, and wage gains have moderated. These are all classic signs of a cooling economy.
Source: BlackRock
In 2021 and 2022, the Fed waited too long to act, which resulted in the highest rate of inflation seen in decades. Now, the Fed may be making the same mistake in reverse. The Fed paused cutting interest rates after its December 2024 meeting, despite inflation continuing to decline. As you can see in the chart above, this has left the Fed funds rate with the largest gap above inflation that we have seen since 2007. This same chart indicates that forward asset returns over the last 40 years have consistently been positive in response to this phenomenon, as the Fed will likely eventually recognize its mistake and begin cutting interest rates.
Inflation has cooled, wage growth has moderated, and economic momentum is slowing. Now is the time for the Fed to focus not on headline fears, but on real-time data. Tariffs have not yet translated into price increases, and employment indicators suggest slack is growing. As a matter of fact, as you can see from our final chart today, inflation data has surprised to the downside relative to expectations. Therefore, the Fed should consider not delaying necessary rate cuts to defend its credibility. Doing so risks repeating the mistake it made during the pandemic…ignoring the lagging effects of previous decisions.
Just like Lord Farquaad, the Fed continues “compensating” for its previous mistake of telling the world that inflation was “transitory”. Cutting rates too late would be just as damaging as hiking them too slowly… the Fed's credibility is once again on the line. The CFPs of Impel Wealth Management will continue monitoring these critical data points and their impact on the economy and your portfolios. We want to keep you informed about this as we continue “Moving Life Forward.”
© 2025 Jesse Hurst
Senior Wealth Manager
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