The Federal Reserve today announced a 0.75 percentage point increase in the federal funds rate. It is the fourth such increase this year, and part of the Fed’s larger effort to combat inflation. CEI Senior Fellow Ryan Young says this is a positive step, but not a cure-all:
“The Federal Reserve is continuing to do the right thing, albeit slowly. The main cause of today’s inflation is that the Fed overreacted to the COVID-19 pandemic and created too much new money. The Fed also has the power to fix its own mistakes and is starting to do so. Today’s 0.75 percent federal funds rate increase is one of those steps, but even in the best-case scenario, it will be some time before inflation comes back down to Earth.
“The Fed’s actions have lag times of six to 18 months, and the Fed didn’t stop its runaway money creation until four months ago. Inflation may have peaked already, but it will remain high at least into next year.
“Since COVID first hit, the Fed has grown the money supply by about a third, while real economic output has grown by only about 4 percent. That massive imbalance changed the ‘exchange rate’ between money and real goods and services, which is what inflation is. For lower inflation, the money supply needs to grow in closer sync with real output. Think of it as a matching game.
“Other factors, like oil shocks and supply chain problems, are separate issues with separate solutions. They still matter a great deal, but they are not inflation. It is important that pundits and policymakers are aware of the distinction and avoid turning monetary policy into another Red Team-vs.-Blue Team conflict.
“Congress and President Biden should admit they have little control over inflation, stop bickering about it, and respect the Fed’s independence. They should turn their focus instead to policies like tariff relief, Jones Act repeal, opening up energy supplies, and reducing deficit spending. These won’t address underlying monetary inflation, but they will lower prices on important goods that are hitting people’s pocketbooks.”