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**MARCH 16, 2022**
Kuttner on TAP
The Fed Resists the Inflation Hawks
****
Fed Chair Jerome Powell is playing against type.
The Federal Reserve, as expected, began raising interest rates at the
two-day meeting of its Open Market Committee that ended today. This
afternoon, the Fed announced
a quarter-point hike in the short-term interest rate to the target range
of 0.25 to 0.50, to be followed by other rate hikes as conditions
warrant.
The vote of the committee was 8-to-1, with only St. Louis Fed Chair
James Bullard calling for a half-point hike. This mild policy response
had been widely anticipated. The Fed chair, Jerome Powell, had
previously stated
on March 2 that he favored no more than a quarter-point hike for now.
Mercifully, the Fed did not follow the loudly blared advice of Larry
Summers, who has been on a vendetta against Powell. In his latest screed
,
in Tuesday's
**Washington Post**, Summers called for massive rate hikes and a
deliberate increase in the unemployment rate to slow inflation.
"The Fed's current policy trajectory," Summers wrote, "is likely to
lead to stagflation, with average unemployment and inflation both
averaging over 5 percent over the next few years-and ultimately to a
major recession." Summers called for "rates of 5 percent or
more-something markets currently regard as almost unimaginable."
Well, yes. Rates that high would slow inflation-by creating the very
major recession that Summers says he wants to avoid.
The flaw in Summers's analysis is that the current inflation is not
the result of ordinary demand overheating, much less wage pressures. We
have had a series of supply shocks, compounded by a war.
Artificially engineering a recession will not cure these extraneous
factors. It will cause neither more oil nor more semiconductors to
materialize. Nor will a punishing rate hike cause more affordable
housing to materialize. On the contrary, tight money will make
construction and mortgages more expensive.
Summers's animus seems driven partly by the fact that he keeps
badgering Powell, in one op-ed after another, and Powell keeps prudently
ignoring his advice; and partly by the fact that Powell has the job of
Fed chair that Summers has long coveted.
Summers's own track record on recession and inflation suggests that
this is not an economist whose advice you'd want to follow. In early
2009, as Obama's top economic adviser, Summers lowballed the scale of
stimulus that the economy needed. Then, in early 2010, Summers led
Obama's premature pivot to deficit reduction, condemning the economy
to years of excessively high unemployment and wage stagnation.
There are no easy choices in today's economy, but plenty of bad ones.
Powell deserves credit for ignoring the perverse advice of the inflation
hawks.
****
~ ROBERT KUTTNER
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**Robert Kuttner's latest book is**
The Stakes: 2020 and the Survival of American Democracy
.
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