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**MAY 4, 2022**
Kuttner on TAP
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**** The Fed's Dilemma
The half-point rate hike will make little difference in dealing with the
causes and cures of rising prices.
As expected, the Federal Reserve voted today to raise short-term rates
by half a point and to accelerate the phaseout of its program of
large-scale bond purchases. The vote of the Fed's Open Market
Committee was unanimous. Is this the right policy to cool inflation
without pushing the economy into recession?
It could have been worse, and Fed Chair Jay Powell deserves credit for
resisting pressure for even steeper rate hikes. But most of the
inflationary pressures are beyond the Fed's control.
The risk is that the Fed will get trigger-happy with more drastic rate
hikes if this one doesn't produce results. And in fact, higher rates
will do little in the near term.
Raising costs of borrowed money will do nothing to ease the supply chain
crisis, nor moderate the shortage of affordable housing that leads
landlords to raise rents. In fact, it will worsen inflation by
translating into more costly mortgages, car loans, and credit card
purchases.
Higher interest rates will not reduce corporate price-gouging. Nor will
they cut the price of gas that results from the dislocations of the
Russia-Ukraine war.
Like other surprise bouts of inflation, most notably the one in the
1970s, this one is the consequence of an abrupt shock (the OPEC oil
price increase then; the supply chain bottlenecks now) combined with
other random compounding factors. Despite the claims of some economists,
it has little to do with fiscal overstimulus, and even less to do with
workers' wages, which have lagged behind price increases. The risk
now, as then, is that inflation becomes embedded in the economy and the
Fed keeps raising rates until it triggers a recession.
For the Biden administration, what's needed is a clearer narrative and
better policies. For starters, Biden aggressively could go after
industries that are taking advantage of the inflationary psychology to
gouge consumers. That includes airlines that have raised prices far
beyond the increases in the cost of aviation fuel, and drug companies
that keep jacking up costs of prescription medication, and monopolies in
the food industry that raise retail prices far beyond what they pay
farmers.
Biden could make an even stronger case for policies that put more money
in consumers' pockets, such as extending the Child Tax Credit. He
could stop dithering on student debt and order a cancellation that would
save tens of millions of Americans hundreds of dollars a month.
There is no instant cure for this inflation, but government can do two
big things. It can avoid making things worse by triggering a recession,
and it can pursue policies that help consumers by offsetting higher
prices.
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~ ROBERT KUTTNER
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