Federal Reserve Signals Interest Rate Hike to Fight Inflation: CEI Statement

The Federal Reserve today signaled an interest rate hike is coming in March to combat inflation. CEI Senior Fellow Ryan Young believes the Fed needs to act more quickly and points to other tools the Fed, Congress, and the Biden administration should use to lower inflation and help the economy.

Statement by Ryan Young:

“Inflation is happening because the money supply is growing faster than are goods and services. Job number one for the Federal Reserve and other policymakers is to get them back in balance. The good news is that, as expected, the Fed announced it will do this by raising interest rates. The bad news is that it will wait until March to do so. It will also continue its inflation-inducing bond buying program until March, instead of ending it right away. There is no good reason for the delay.

“Interest rate hikes work by slowing the velocity of money, so even if the quantity of money doesn’t change, inflation goes down because each dollar is spent and re-spent fewer times.

“The Fed does have another powerful tool at its disposal besides interest rates—open market operations. By buying and selling government bonds, the Fed can add or subtract from the money supply very quickly. Since inflation is high, the Fed should sell from its portfolio, and remove from circulation the dollars it receives.

“The Fed instead signaled that it will continue to buy bonds until March, even though its portfolio has doubled in just the last ten months and now stands at $9 trillion. While there is a case to be made for gradualism, this is still a mistake.

“Re-syncing the money supply to output is a tricky business, especially when economic activity ebbs and flows with the pandemic. It is easy to overdo it or underdo it. But the Fed can get inflation back under control if Congress and President Biden can resist the temptation to interfere. Unfortunately, it’s an election year, and political interference with the Fed is a bipartisan tradition dating at least back to the Eisenhower and Johnson administrations, respectively.

“There are plenty of things for the political branches to do besides meddle with Fed policy. Getting rid of obstacles to economic growth will help to rebalance the money supply with goods services. Congress and President Biden should remove tariffs, which raise the prices of hundreds of billions of dollars of goods by as much as 25 percent. Federal and state officials should loosen port and trucking rules that artificially clog supply networks. State and local officials should end excessive occupational licensing and loosen overzealous permit, zoning, and land-use restrictions that block opportunities for millions of people. And since deficit spending adds to inflation by increasing the money supply, all levels of government should spend less.”