Why relying solely on monetary policy may not be sufficient to combat inflation
Regarding inflation, monetary policy might not be getting the job done.
The Federal Reserve has been trying to slow down the economy and bring inflation under control, but despite raising interest rates eight times a year, it doesn’t seem to be working. The economy is still strong, with a 50-year low unemployment rate of 3.4%, and consumers are still spending.
Federal Reserve Chair Jerome Powell assured the Senate Banking Committee and the House Financial Services Committee of the Fed’s commitment to tamping down inflation. However, their toolbox is no longer as effective in adjusting how the economy works.
According to Neil Irwin, chief economic correspondent at Axios, some shifts in the economy have made the Fed’s policies less effective than they used to be. For example, fewer employment opportunities and fewer activities are tied up in durable physical goods. This means that interest rates may be less effective in stimulating the economy. Additionally, businesses use lean inventories, while wealth inequality is a possible factor. Billionaires’ spending may not be as sensitive to asset price changes as the middle class.
Despite the limited effectiveness of monetary policy in the current economy, it is unlikely that the Fed needs to find new ways to achieve its goals. There are always lags, and their impact may not be immediate. Moreover, the economy would likely be stronger if interest rates had remained at zero the last year.
- The Fed’s inflation target is 2%. In December 2018, it was just 1.9%, while January 2019 saw a slight rise to 2.0%.
- The Fed has indicated that it will be patient regarding further rate hikes.
- The yield curve inversion in March 2019 sparked concerns about a possible recession.
Monetary policy may not be as effective in the current economy as it has been in the past. The Fed should continue monitoring the situation and be patient in deciding its future actions.
The effectiveness of monetary policy in controlling inflation and stimulating the economy is not absolute. The current economy presents challenges that the Fed must navigate with patience and careful consideration.