There's little evidence that the Fed knows how to reduce prices without bringing the economy down with them, writes EricLevitz
Photo: Ahn Young-joon/AP/Shutterstock Last month, consumer prices in the U.S. rose at their fastest rate in 40 years.
If this policy works as intended, it will slow U.S. economic growth without stalling it. The theory of the Fed’s case goes like this: As the cost of credit rises, households and businesses will engage in less debt-financed consumption and investment and in more saving. This will prevent the gap between demand and supply from widening amid economic shocks that constrain the latter. As demand moderates, price growth will slow.
As J.W. Mason notes, U.S. inflation began falling in 1996 right when oil prices peaked — and then started rising again in 1999 at the precise moment when oil prices were rising again. We do not have access to the counterfactual, of course. In the absence of the Fed’s tightening, employment growth might have started accelerating in 2016. It’s possible that the central bank’s rate hikes contributed to a falloff in business investment that year . Regardless, to the extent that the central bank’s rate hikes suppressed demand and inflation in 2016 through 2018, they did so only marginally.
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