Tom Williams/Pool via AP
Federal Reserve Chairman Jerome Powell announced a half-point interest rate hike today, part of an attempt to curb inflation.
As expected, the Federal Reserve voted today to raise short-term rates by half a point and to accelerate the phaseout of its program of large-scale bond purchases. The vote of the Fed’s Open Market Committee was unanimous. Is this the right policy to cool inflation without pushing the economy into recession?
It could have been worse, and Fed Chair Jay Powell deserves credit for resisting pressure for even steeper rate hikes. But most of the inflationary pressures are beyond the Fed’s control.
The risk is that the Fed will get trigger-happy with more drastic rate hikes if this one doesn’t produce results. And in fact, higher rates will do little in the near term.
Raising costs of borrowed money will do nothing to ease the supply chain crisis, nor moderate the shortage of affordable housing that leads landlords to raise rents. In fact, it will worsen inflation by translating into more costly mortgages, car loans, and credit card purchases.
Higher interest rates will not reduce corporate price-gouging. Nor will they cut the price of gas that results from the dislocations of the Russia-Ukraine war.
Like other surprise bouts of inflation, most notably the one in the 1970s, this one is the consequence of an abrupt shock (the OPEC oil price increase then; the supply chain bottlenecks now) combined with other random compounding factors. Despite the claims of some economists, it has little to do with fiscal overstimulus, and even less to do with workers’ wages, which have lagged behind price increases. The risk now, as then, is that inflation becomes embedded in the economy and the Fed keeps raising rates until it triggers a recession.
For the Biden administration, what’s needed is a clearer narrative and better policies. For starters, Biden aggressively could go after industries that are taking advantage of the inflationary psychology to gouge consumers. That includes airlines that have raised prices far beyond the increases in the cost of aviation fuel, and drug companies that keep jacking up costs of prescription medication, and monopolies in the food industry that raise retail prices far beyond what they pay farmers.
Biden could make an even stronger case for policies that put more money in consumers’ pockets, such as extending the Child Tax Credit. He could stop dithering on student debt and order a cancellation that would save tens of millions of Americans hundreds of dollars a month.
There is no instant cure for this inflation, but government can do two big things. It can avoid making things worse by triggering a recession, and it can pursue policies that help consumers by offsetting higher prices.
