Inflation is down and the Fed didn’t do it 


Articles about the economy in recent months often praise the Federal Reserve’s success in taming inflation. More than one commentator reflecting what seems to be a media consensus, put it this way: “It’s all about the Fed.” The question is, is that really the case?  

Inflation has indeed come down from a peak of roughly 9 percent in mid-2022 to 3 percent or even less in January 2024. More price reductions are predicted by economists for what such predictions are worth. The important point, however, is that the recent moderation in prices is the result of causes that have little to do with the Fed or its policies, and emphasis on the Fed role lets the real culprits for inflation get away with it.  

What has happened is that the main causes of price increases in 2022 and early 2023 have been reduced or eliminated. COVID-related shortages of computer chips, new and used cars and the like are no longer raising prices. Ships aren’t lined up to be unloaded at ports. Truck drivers are back on the road and domestic trucking services are less expensive. Gasoline prices have come back to levels of a few years ago.  

Falling prices for the last several months are basically the result of supply catching up after Covid interruptions. Once overwhelmed supply chains have filled up and returned to normal. Energy and especially gasoline prices have fallen back, reducing the price of many other goods and services. U.S. oil, natural gas and green energy production has surged. Markets seem to have adjusted to the Ukraine War and to Russian, Saudi and Iranian efforts to raise prices. There is still upward pressure on prices as wholesalers and retailers of goods and services try to “pass through” earlier increases, but not all of these efforts will succeed. In short, improvements on the supply side are what is moderating inflation.  

The Fed has been trying to work on the demand side. It has suppressed demand by driving mortgage rates to nearly 8 percent just a few months ago (7 percent today) to bring housing demand down. Credit card rates are up, which also should reduce demand. It is clear though that these efforts to constrain purchasing power have not made a significant contribution to the improving inflation picture. Housing prices and rents that the Fed is targeting have not receded much. The U.S. economy is still growing at a reasonably healthy rate, adding jobs and raising wages.  

The intriguing question then is why do so many writers and media pundits give the Fed credit for falling inflation. Why do they parrot the line that “it’s all about the Fed” when it clearly is not? 

The great economist John Maynard Keynes would understand. In the last chapter of his “General Theory of Employment Interest and Money,” he wrote about “the potency of an idea to exorcize the obvious.” His experience in the real world told him that economic ideas “when they are right and when they are wrong,” are more powerful than our grasp of economic reality. Belief in the Fed is just the latest example of this well-established pattern.  

What Keynes would see as the potent idea in 2024 is that the Fed and the interest rates that it manipulates are the most powerful levers for fighting inflation. If the Fed raises interest rates, the theory goes, the economy will slow, and inflation will come down. What Keynes would see as “the obvious” is that the recent fall in inflation from 9 percent to 3 percent has little to do with the Fed or an economic slowdown it has been trying to engineer. 

Enlightened opinion has been wrong about inflation recently because belief in the Fed and monetary policy serves both theological and political purposes. When the media persuades the public that inflation is all about the Fed, it supports the virtue of austerity while absolving powerful private sector players of responsibility for inflation and other economic ills.   

If voters are convinced by the media that the government, not the financial sector and lax supervision by the Federal Reserve and other agencies were responsible for the housing disaster of 2007-2010, the search for policy solutions will continue to go in the wrong direction. The millions of Americans who lost their homes and suffered through high unemployment that followed the housing crash have been directed to other scapegoats while the proponents of austerity when that housing disaster occurred largely escape responsibility for the lost nest eggs that it caused. 

Focus on Fed monetary policy also siphons attention away from the excessive influence of corporate C-suites (See “The Big Short,” “Goliath,” “Fool’s Gold,” “These Are the Plunderers,” and other good books on the subject). The notion that “it’s all about the Fed” and monetary policy relegates problems caused by C-suite self-dealing and mistakes to the back burner.  

Specific sectors of the U.S. economy where competition is weak also drive inflation. Health care for example is a sector where prices have risen faster than the CPI for decades. State and local interests that dominate health care allow hospitals, assorted sellers of supplies and equipment, layers of local administrators, local insurance specialists, and fantastically complex state and local insurance regulations to raise health care prices year after year. This drives ordinary Americans to distraction, but the health sectors’ costly localism is a political issue that the Fed cannot touch. 

Belief in monetary policy controlled by the Fed to largely manage the economy minimizes the role of government investments. These investments, historically major drivers of development, are referred to pejoratively as “spending.” Sectors like defense, science, public works, public safety, education, social security, public health and childcare that often drive growth and employment are seen negatively because monetary policy directed by the Fed is assumed to take care of so much.

In sum, the belief that “it’s all about the Fed” ignores reality. Exaggerating the Fed role in fighting inflation exonerates culprits in the private sector. It also undervalues the importance of government policies that are needed to stimulate supply and prevent price manipulation. Government and private sector actions to deal with the COVID crisis, reopen supply chains, expand energy production, and invest in infrastructure get short shrift when in fact they have done far more to fight inflation than Fed monetary policy. “Enlightened opinion” in 2024 gives the Fed far too much credit for bringing inflation to heel, and excessive reliance on the Fed and monetary policy threatens the country’s ability to deal with other vitally important economic issues in the future. 

Paul A. London, Ph.D., was a senior policy adviser and deputy undersecretary of Commerce for Economics and Statistics in the 1990s, a deputy assistant administrator at the Federal Energy Administration and Energy Department, and a visiting fellow at the American Enterprise Institute. A legislative assistant to Sen. Walter Mondale (D-Minn.) in the 1970s, he was a foreign service officer in Paris and Vietnam and is the author of two books, including “The Competition Solution: The Bipartisan Secret Behind American Prosperity” (2005).

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