Jan 24, 2022 - Economy

The Fed's inflation fight ignites interest rate debate

GIF of a balloon in the shape of a question mark.

Illustration: Brendan Lynch/Axios

A debate is shaping up over whether tighter money from the Federal Reserve hiking rates will actually rein in inflation.

Why it matters: Consumer prices are up 7% year over year, the highest rate of increase since 1982. It's causing major headaches for the White House.

What they’re saying: Until we diagnose what’s really causing the inflation, we won’t be able to treat it, economist Stephanie Kelton wrote in a Substack column last week.

  • “It takes a certain hubris to assert that by nudging a single price — the federal funds rate — higher, the entire economy can be shifted back to a stable inflation path,” she writes.
  • Point is, it's a mistake to believe the fix for inflation that worked 40 years ago will work again.

Other economists think the Fed needs to move quickly.

  • “The Fed is seriously behind the curve and has to get serious about fighting inflation,” Ethan Harris, the head of global economics research at Bank of America Merrill Lynch Global Research, wrote in a note last week.
  • Larry Summers has been saying the same thing; he and others argue that too much U.S. stimulus is to blame for price increases.

The pandemic is still making the economy weird. Kelton — and many others — cite the continuing supply chain snags as part of the story.

  • “If supply-chain issues can be sorted out, the current inflation tizzy will probably subside early this summer,” writes economist James K. Galbraith in a blog post last Friday.
  • The White House was saying similar things this summer — but Biden also said last week that fighting inflation was the Fed's job.

Go deeper: Why the Fed might want to jolt the markets

Go deeper