Economies are not known for being simple things to untangle. Unlike in the physical sciences, where if you do enough calculations, you can shoot a projectile into an asteroid moving at an incredible speed 7 million miles away, the so-called laws of money deal with the hazier and less predictable forces of group psychology and consumption.
That’s why reasonable people can disagree on the proper solutions for runaway inflation that has been hammering U.S. families and eroding away wage gains. Most people can agree that the Federal Reserve’s efforts to end an era of practically interest-free money has helped slow down demand, even though a big part of the inflation equation is the supply chain shocks downstream from the COVID-19 pandemic and Russia’s invasion of Ukraine, factors over which the Fed has no control.
Yet as the Fed has moved aggressively ahead with more dramatic rate hikes than we’ve seen in decades — bringing the cost of borrowing to levels that remain historically on the low end — many, including this board, have urged a measured approach that’s less likely to result in a recession that could do more long-term damage than inflation that might already be on the road to cooling off.
When announcing another 75-base-point hike yesterday, Fed Chair Jay Powell rightly acknowledged that there are lags between the measures enacted so far and their impact, indicating that he may tap the brakes on his brake-tapping strategy and respond to changing circumstances, minimizing future hikes. Good. Even as Powell insists that a stumbling economy can easily be addressed with a new injection of cash, we know from experience that recessions have a way of getting out of hand.
Powell and the other Fed governors should also meaningfully engage with the fact, as pointed out by the likes of the chief economist at UBS Global Wealth Management, hardly a left-wing ideologue, that soaring prices are being driven in part by corporate profiteering using natural inflation as cover. No amount of tightening demand can fix that.