We’ve argued for many months that a free-wheeling multi-trillion dollar government spending and borrowing spree by Biden and Congress combined with a now-tighter monetary/interest rate policy by the Fed are working at cross purposes.
So when we saw this week that monetary expert Judy Shelton made this same argument in the Wall Street Journal, we were overjoyed. She has made the case more artfully than we have, so we have provided an excerpt.
If you were expecting Jerome Powell to unveil an elegant new intellectual framework for monetary policy in Jackson Hole, Wyo., last week, the Federal Reserve chairman’s speech on the need for “forceful and rapid steps to moderate demand” set you straight. But the Fed’s determination to pummel growth will only make matters worse so long as misguided fiscal policies engorge the money supply.
Welcome to the era of good-cop, bad-cop tactics from major government institutions. Fiscal and monetary policy are now working at odds to fight inflation. The Fed could crush demand by raising interest rates to stratospheric levels only to have a spendthrift White House and complicit Congress pump up consumer prices through fiscal measures that expand spending power—cash payments, subsidies, rebates, student loan forgiveness…
When asked whether fiscal initiatives or federal budget decisions will undermine their monetary policy objectives, Fed officials are apt to sidestep the question. That’s the problem: There’s no point relying on interest rates to control the money supply when government spending continues to exacerbate inflationary pressures.
Well said. What is needed now are a series of pro-production policies like deregulation, pro-drilling energy initiatives, and tax rate reductions combined with steep cuts in government spending. That will do as much as or more to lower inflation than Fed interest rate hikes.
Read Judy Shelton’s full article here: https://www.wsj.com/