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Inflation Terror at the Fed

This article was first published in The Hill on July 11, 2022. You can read it here.



President Franklin Roosevelt said at his first Inauguration in March 1933 that “the only thing we have to fear is fear itself … unreasoning, unjustified terror.”  FDR was speaking at the depths of the Great Depression but what he said is relevant in 2022 when a recession is not yet a sure thing. Today’s unreasoning terror is that inflation will surge out of control when the thing to fear is that raising interest rates could lead to a dangerous downturn.


Fed Chairman Jerome Powell said recently that inflation is a greater danger than recession, and other Fed officials agree with him. This is ominous because inflation has never hurt Americans as much as a dozen recessions since the founding of the country when prices fell instead of going up and farmers and workers suffered acutely. Unfortunately, even Democrats like Treasury Secretary Janet Yellen, share Powell’s view. She rushed to “confess” a few weeks ago that inflation in mid-2022 is worse than she thought it would be and that she was wrong to think that it would ease quickly. She obviously was wrong to expect a quick end to rising prices but in the Democrats’ defense every administration makes rosy predictions. The more important mistake is to cheer for those who think raising rates is a good idea and to respond timidly to the Fed’s willingness to risk a recession to blunt this episode of inflation.


Democrats like Yellen should untie themselves from the Fed and the crowd pushing high interest rates. Democrats have been right to target spending toward long-term investment in alternatives to fossil fuels. They are right to be fighting inflation by attacking bottlenecks at ports and transport hubs and right to add new capacity to produce advanced computer chips and similar high-tech supplies. Indeed, some of the price increases associated with these bottlenecks are fading already like ocean shipping rates, lumber prices, and inventory shortages at Walmart, Target, and other outlets. Unfortunately, high interest rates will do little to bring the worldwide surge in energy prices down and Russian President Vladimir Putin would love to see the Fed cause a recession that would further discredit the U.S. and democratic government.


Democrats also should be explaining more clearly to the public how they; the previous administration and Congress took successful action to ease the pain of the COVID-19 recession. Both administrations and the Congress were right to spend over $5 trillion of government money to replace the lost incomes of 20 million Americans put out of work by COVID-19 when large parts of the economy shut down. A hugely interesting question that economists should be asking is: What would have happened after the Crash of 1929 if President Hoover had spent government money to support incomes and investment the way government did from 2020 to 2022? My view is that the world would have avoided the Great Depression if Hoover had acted so boldly. 


It is also worthwhile to see how President Trump temporarily made Republicans recognize the central role that government has to play when the economy is in trouble. For all the viciousness and deliberate divisiveness of his politics, when it came to the COVID recession he thought like a developer, a borrower, a newcomer. He had always benefited from low interest rates and spending, and that is what he supported when COVID hit. He brought reactionary Republicans to support stimulus spending that they never would have supported if it had been proposed by Democrats. Since President Biden’s election, Republican reactionaries have reverted to form. They opposed the stimulus Biden added in early 2022 and now blame it for inflation. They also blame Biden for supporting alternative energy development, arguing that it has discouraged oil companies from drilling new wells, although domestic oil and gas production is increasing now.  


In the 1970s, the last time the oil cartel had the power to raise prices, Americans adjusted, and cars, homes and industries became far more efficient. Interest rates of 6, 7 or 8 percent rather than 2 or 3 percent will make it more expensive to adjust to climate change and a less globalized post-Ukraine world. The risk is not inflation. The risk is what will happen if Americans can’t afford to borrow to help the economy adapt. There will be less demand for carpenters, plumbers, electricians, factory workers, shipping services, drivers and warehouse personnel, wages will stagnate, and inequality will worsen.


Raising rates is risky. What Fed chairmen like Powell and his predecessors like to call a “soft landing” is the slippery slope to recession. If Powell and his fellows overshoot, there will be a recession with serious economic and political consequences. This is what we should fear.