The Fed Is Doing the Right Thing

They are Just a Year and a Half Too Late

Jerome Powell and the Federal Reserve Bank are doing the right thing by pursuing a tighter monetary policy to fight inflation. They are just a year and a half too late doing it, which allowed inflation to get out of control.

As I’ve noted in many previous blog posts, including this one, the signs of impending inflation were clear long ago. Still, government officials and Fed members from President Biden to Jerome Powell claimed that inflation was transitory and would soon come back down. Move along: nothing to see here.

The events of the past year and a half present a good lesson in monetary politics. I don’t know whether or not that talk about transitory inflation was the sincere belief of those who publically made the claim, or if the assertion was politically motivated. But it seems that if “inflation is transitory” was Biden’s line, those at the Fed would have been creating some friction by disagreeing.

What if the Fed had disagreed and started raising interest rates in mid-2021? The argument against them would have been that Fed policy was choking off economic growth to fight something that is not a problem. Neither the general public nor the Biden administration appeared alarmed by inflation. So a tighter monetary policy in 2021 would have led people to accuse the Fed of standing in the way of a recovery from the COVID-induced economic downturn, for no good reason.

By letting inflation get out of control, the Fed’s tightening policy now appears to be a necessary remedy to address a real problem.

I can’t read the minds of the people at the Fed. Still, from a political standpoint, it is easy to picture Jerome Powell and his cronies bowing to the winds of popular opinion by sitting on the sidelines as inflation ramped up. Why implement unpopular inflation-fighting policies when there is no demand for them? The official claim from the White House is that the problem would solve itself.

Once the problem was apparent to everyone, including those in the White House, popular opinion shifted toward the restrictive monetary policy the Fed has pursued.

There are two possibilities here. One is that the nation’s monetary experts at the Fed were caught unaware as inflation accelerated, and they didn’t realize what was happening. The other is that the Fed waited to engage in inflation-fighting policies, even as they saw high inflation levels until the Biden administration and popular opinion supported it.

The second possibility looks pretty plausible. The Fed, supposedly insulated from political pressure, was yielding to political pressure.

Randall G. Holcombe is a Senior Fellow at the Independent Institute, the DeVoe Moore Professor of Economics at Florida State University, and author of the Independent Institute book Liberty in Peril: Democracy and Power in American History.
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