TThe US Federal Reserve will meet again On September 20-21, while most analysts expect another significant rate hike, there is a strong case for the Fed to take a breather from monetary tightening. While its rate hike so far has slowed the economy – it’s clear that housing sector Its effect on inflation is less certain.
Monetary policy usually affects economic performance with long and variable delays, especially in times of turmoil. Given the depth of geopolitical, financial and economic uncertainty – not least about the future course of inflation – it would be wise for the Federal Reserve to halt interest rate hikes until a more reliable assessment of the situation can be made.
There are several reasons for the postponement. The first is simply that inflation has slowed sharply. Consumer Price Index (CPI) Inflation – the measure most relevant to households – was zero In July, and most likely to be zero or even negative in August. Similarly, the deflator for personal consumption expenditures – another measure often used on the basis of GDP calculations – decreased by 0.1% in July.
Some will be tempted to adopt tight monetary policy because of this apparent victory over inflation. But this argument is committed After this, so because of this fallacy (suppose that since a happened before b, A must have caused b) and confuses correlation with causation. Moreover, most of the main factors behind inflation today have nothing to do with dampening demand. Supply side constraints drove up inflation, and now supply side factors are bringing inflation back down.
To be sure, many economists (including some at the Federal Reserve) expected to overcome supply-side disruptions caused by the Russian war in Ukraine and the pandemic. very quickly. In this case, they were wrong, but only about how quickly the conditions would be printed. Much of this failure was understandable. Who would have thought that the storied US market economy would be so lacking in resilience? Who would have expected that he would face a severe shortage of baby milkfeminine hygiene products and the elements Necessary to produce new cars? Is this the United States or the Soviet Union in its dying days?
Moreover, before Vladimir Putin began massing troops on the Ukrainian border late last year, no one expected a major ground war in Europe. Now no one can predict how long the war will last, or how long it will take political leaders to stop the associated price hikes (some of which are simply the result of price gouging – “war exploitation”).
However, the overall inflation story is simple: many of the supply-side factors that drove prices higher earlier in the recovery are now being reversed. It is worth noting that the CPI of gasoline has decreased by 7.7% In July, special indicators point to a similar decline in August. Once again, this price reversal was expected and expected; The only doubt is the timing.
Other prices follow the same pattern. In July, core CPI (which does not include energy and food) increased by a relatively modest rate 0.3%Only the basic PCE shrinkage factor rose 0.1%. That points to easing the backlog of imported goods — the problem behind empty store shelves and business disruptions earlier in the pandemic.
Recent data support this conclusion. Federal Reserve Bank of New York global supply chain stress index It has fallen sharply from its peak last fall to just over what it was before the pandemic. While shipping costs are still well above pre-Covid levels, they are down nearly 50% From the highs last fall and is likely to continue to decline. After skyrocketing during the pandemic and in the first months of the Russian war, prices for a wide range of commodities fell to pre-pandemic levels. The Baltic Dry Goods Indexfor example, is below the average for 2019.
Auto manufacturers have also overcome problems caused by shortages in semiconductors around the world. According to the Federal Reserve Industrial Production IndexAuto production was actually above its pre-pandemic level as of July.
After a year of getting a lot of bad news about inflation and the supply side factors behind it, we’re starting to get a lot of good news. And while no one would suggest that monetary policy-making be based on just two months of data, it’s worth noting that inflation expectations have slipped as well, with University of Michigan Consumer Confidence Index and the Federal Reserve Board in New York Survey of Consumer Expectations Heading down in July.
The standard rationale for Fed policy tightening is that it is necessary to prevent a cycle of self-fulfilling expectations, in which workers and firms expect higher inflation and set wages and prices accordingly. But this cannot happen when inflation expectations fall, as they are now.
Some analysts suggested that the United States needs a long time higher unemployment To bring inflation back to the Fed’s target level. But these arguments are based on standard Phillips curve models, the fact is that inflation has parted ways from the Phillips curve (which assumes a direct inverse relationship between inflation and unemployment). After all, the surge in inflation last year was not caused by a sudden big drop in unemployment, and the recent slowdown in wage and price growth cannot be explained by higher unemployment.
Given the latest data, it would be irresponsible for the Fed to deliberately create much higher unemployment, out of blind belief in the importance of a persistent Phillips curve. Policies are always made under conditions of uncertainty, and the uncertainties are especially great now. With inflation and inflation expectations waning, the Fed must place more importance on the downside risks of further tightening: that is, it will pay US economy in stagnation. That should be reason enough for the Fed to take a breather this month.
Joseph E. Stiglitz Nobel laureate in economics, university professor at Columbia University, and former chief economist at the World Bank.