Good morning, distinguished economists, policymakers, and thought leaders,

Today, we address a critical crossroads in global macroeconomic policy—one shaped by years of inflationary pressures, monetary missteps, and the ongoing turmoil of trade wars and tariffs. As we review the Federal Reserve and the European Central Bank’s actions from 2021 to 2025, it becomes abundantly clear that the principles championed by Milton Friedman, Friedrich von Hayek, Ludwig von Mises, and their modern-day counterparts Steve Hanke and John Hearn, should have been central to both institutions’ strategies.

The failure to adhere to disciplined monetary policies, focus on money supply growth metrics like M2 and M3, and align these with Real GDP (RGDP) trends has left both the Fed and the ECB in uncertain terrain. More alarming, this oversight risks prolonging inflationary pressures, undermining economic recovery, and intensifying the fallout of ongoing trade wars. The same Jerome Powell says in this video https://www.youtube.com/watch?v=FjxyN3VilNM&t=3s that the Trump tariffs do affect his decisions. This is spot on what Lagarde said a week earlier at the ECB.

This keynote outlines 21 compelling reasons why the Fed and ECB misstepped and the clear corrective actions both institutions should have embraced under the guidance of these towering figures in macroeconomic thought.

1. Neglecting Money Supply Growth Metrics

Both the Fed and ECB ignored the critical role of M2 (Fed) and M3 (ECB) in driving inflation. Hanke consistently emphasized that keeping M2 growth at 6% would maintain 2% inflation. Instead, the surge in money supply post-2020 directly fueled inflationary pressures.

2. Reactive Rather than Proactive Policy Stances

Both central banks adopted a “wait-and-see” approach to inflation, only pivoting after inflationary trends became entrenched. This reactive stance undermined their credibility and created unnecessary economic volatility.

3. Failure to Anchor Inflation Expectations

Despite claiming 2% inflation targets, inconsistent actions eroded trust in both institutions’ ability to manage price stability. Anchored expectations, as outlined by Friedman, are vital for preventing wage-price spirals.

4. Overreliance on Interest Rate Adjustments

Both the Fed and ECB leaned too heavily on interest rate hikes in 2022 without addressing core drivers like excessive liquidity. Interest rate tools alone are insufficient to combat inflation stemming from supply-side shocks and fiscal policies.

5. Lack of Coordination with Fiscal Policy

Fiscal stimulus packages introduced during the pandemic created excess liquidity without parallel monetary controls. The Fed and ECB failed to anticipate the inflationary effects of unchecked fiscal expansion.

6. Ignoring the Lagging Effects of Monetary Policy

Both institutions miscalculated the delayed impact of rapid rate hikes, leading to overcorrection. As Hearn has emphasized, monetary policy changes need time to filter through the economy.

7. Misaligned Policies with RGDP Trends

By not aligning their policies with RGDP trends, both banks risked stifling growth. Observing real economic performance is critical to striking a balance between inflation control and sustained recovery.

8. Neglecting Structural Inflationary Pressures

Supply chain disruptions, labor market imbalances, and rising energy prices were ignored as structural contributors to inflation. A more holistic approach could have mitigated long-term pressures.

9. Failure to Monitor M3 in the Eurozone

The ECB’s oversight of M3 money supply trends, highlighted by Hanke, allowed liquidity to build unchecked. Proper monitoring would have alerted policymakers to inflationary risks earlier.

10. Limited Attention to Real Wage Growth

Inflation outpaced real wage growth, eroding purchasing power. Both institutions failed to assess this critical variable, further fueling consumer frustration and economic discontent.

11. Poor Communication Strategies

Unclear and inconsistent messaging amplified market uncertainty, leading to unnecessary volatility. Clear communication, as advocated by Friedman and Hearn, anchors expectations and stabilizes markets.

12. Overlooking Global Trade Dynamics

The Fed and ECB underestimated the inflationary impact of tariff policies and retaliatory trade measures. These policies disrupted global supply chains, further exacerbating price pressures.

13. Insufficient Quantitative Tightening

While both institutions attempted balance sheet reductions, their quantitative tightening measures lacked consistency. Gradual but firm reduction schedules could have avoided liquidity shocks.

14. Failure to Consider the Negative Fiscal Multiplier

Hanke correctly pointed out that regime uncertainty and trade wars turned fiscal multipliers negative. Uncoordinated stimulus and trade policies diluted monetary efforts.

15. Weak Response to Energy Price Shocks

Energy price volatility significantly contributed to inflation. Neither the Fed nor the ECB adopted targeted measures to address energy-driven price fluctuations.

16. Allowing Monetary Policy to Lag Behind

Both institutions hesitated to tighten policies at the right time in 2021, allowing inflation to become entrenched. Timely action would have prevented prolonged instability.

17. Overestimating Transitory Inflation

Misjudging inflation as transitory delayed effective interventions, causing further damage. Clear metrics on money supply and RGDP could have countered this oversight.

18. Lack of Policy Synchronization Between Central Banks

Disjointed policies between the Fed and ECB created imbalances in global markets. Collaborative frameworks could have minimized international spillover effects.

19. Ignoring Market Signals

Bond market movements and inflation expectations signaled persistent pressures as early as 2021. Both institutions failed to heed these warnings.

20. Neglect of Financial Stability Concerns

Excessive tightening without considering financial market liquidity risks created unnecessary strains, particularly in the Eurozone, where sovereign debt concerns remain.

21. Mismanagement of Public Expectations

The combination of inconsistent guidance and misaligned policies eroded public trust in both institutions. Restoring credibility will require clear, disciplined adherence to frameworks like the 4-Point Criteria.

A Path Forward: Returning to Sound Macroeconomics

To avoid further economic instability, the Fed and ECB must adopt principles championed by Hanke, Hearn, Friedman, von Hayek, and von Mises:

• Focus on Money Supply Control: Keep M2 (Fed) and M3 (ECB) growth aligned with RGDP to ensure inflation remains tethered to targets.
• Commit to Anchoring Expectations: Deliver consistent and transparent messaging to restore trust.
• Harmonize Monetary and Fiscal Policies: Work with fiscal authorities to avoid contradictions and neutralize inflationary risks.
• Adopt Long-Term Strategies: Discourage reactionary measures and focus on sustained economic health.

In the words of Milton Friedman, “Inflation is always and everywhere a monetary phenomenon.” It is time for central banks to honor this wisdom and lead with clarity, discipline, and foresight. Let us learn from the past to navigate the present and secure a stable future.

Thank you.

This keynote draws on the profound insights of the five economists and offers a compelling critique of the Fed and ECB’s policies from 2021 to 2025.

Jorge Zuazola