Public discourse surrounding the US Federal Reserve has been mired as of late by widespread discontent with regard to the series of interest rate hikes that have taken place over the past eight months.
The common theme running through these critiques has been that the Fed, through its leadership on FOMC, has brought much difficulty upon the American economy. Whether it’s those making arguments that interest rate moves have threatened growth while in no way improving prevailing inflation, or that the Fed has moved far too slowly in its initial response to rising prices, both narratives lack a nuanced understanding to the many factors involved in monetary policymaking.
Those occupying the political left, whom I presumed would have commended the Fed for addressing the problem of inflation through proactive and decisive measures, have shown to be far too aligned with Modern Monetary Theory (MMT)—despite its numerous intellectual pitfalls—rather than engaging in reasonable debate to the challenges involved in bringing down consumer prices. Notwithstanding the party’s respectable track record acknowledging that high inflation hurts the poor more than any other income class, the Democrats have proved to be perhaps most critical of America’s central bankers, touting not that the Fed’s actions will help bring down prices but rather that their actions will cripple demand, induce recession, and shatter employment for years to come.
Those on the political Right are equally discontent. Historically aligned with capital owners and commercial interests, the Republican party has customarily favored appointing monetary hawks within the Fed’s leadership so as to preempt inflation through lean-against-the-wind rate hikes, thus protecting capital owners from witnessing their financial returns inflated away over time. Given these preferences, one would expect the American Right to have been in favor of recent interest rate moves, but that doesn’t seem to be the case. Republicans have offered criticism that the Fed has abandoned lean-against-the-wind strategies and moved far too incrementally in their upward rate adjustments.
This begs the question: Why are both parties so dissatisfied with the Fed’s performance?
I argue that neither party really is concerned with inflation. Rather, they have feigned anxieties for political gain. Truth be told, they are quite grateful—at least politically—the Fed has yet to tackle inflation. The reason why: during this year’s mid-terms, inflation proved to be an issue so loathed by voters—regardless of their political orientation—that it became rather easy for political alchemists of both parties to twist the issue to fit their party’s political narratives. Deriving inflation’s precise incipiency, where it emerged, who (really) is responsible for it, and how to best fix it became far less important than casting fault effectively.
Even if one were interested in locating inflation’s source—where it first emerged and the factors which engendered its rapid rise—it becomes rather difficult to do so. Former Treasury Secretary Robert Reich and current Senator Elizabeth Warren will tell you inflation is not the fault of President Biden’s fiscal policies or the Biden Fed but rather the product of corporate greed—firms exercising excessive market power by passing high input costs onto customers at even higher final prices. This argument is appealing to voters on the Left, but it suffers the same kind of selective myopia that conservatives have used to ascribe inflation to President Biden’s fiscal policies.
Another argument contends the Fed itself is guilty of inducing inflation because of its actions taken following the Covid-19 pandemic: increasing M2 more than $7 trillion to stave off deflation surely led to too many dollars chasing too few products. While both parties have attacked the Fed for its Covid response, this argument also misses the mark. When the economic spigot shut off during Covid lockdowns, the Fed had to do what it could to fill the output gap—and their efforts not only achieved that goal but also saved the country from a protracted recession. While Democrats generally dislike the distributional aspects of QE and Republicans loath easy monetary policy, any critique which dismisses the counterfactual of Fed intervention is surely missing the forest for the trees. Had the Fed not intervened, the global economy would be far worse off.
A final argument is that Russia is to blame. As Russia invaded Ukraine, oil prices shot up around the world, leading to rising energy prices across the board. It is important to note, however, that energy is just one component of consumer prices. The Federal Reserve Bank of San Francisco published a model earlier this year which factored out inflation’s supply and demand components and determined that rising energy costs—largely due to a Russian invasion—accounted for a significant proportion of supply-component price increases. This helps us tremendously when trying to deconstruct how much Russia’s foreign policy is to blame for rising energy costs, but it only gives us a partial picture, and certainly doesn’t attribute the Russian invasion wholly responsible for the path of consumer prices.
The truth is there have been many actors in our current inflation drama: the Fed’s response to Covid-19, Russia’s invasion of Ukraine, President Biden’s fiscal policies, and powerful corporations using high input costs as cover for even higher prices. To be clear, these actors are certainly not equally responsible, but their actions cannot be dismissed as not having at least some statistical impact.
The more salient point, though, is that because the current bout of inflation has multiple sources and a perpetually shifting foci, politicians and pundits have been very successful shaping inflation fit their specific narratives. Whether it takes the form of the selective myopia of Robert Reich and Elizabeth Warren using corporate greed and monopoly power to dismiss President Biden’s own culpability, or Republicans using political convenience to pin the blame entirely on President Biden’s fiscal policies, the opacity of inflation dynamics heralded a period of absolutist thinking in a very nuanced world during the mid-terms.
And given the results, it seems it worked.