The Fed is wrong to say that inflation will moderate. It’s time to normalize monetary policy.
The Federal Reserve’s delays in raising interest rates and its continued misreading of inflation, monetary and fiscal policies are now complicated by the negative supply shock imposed by Russia’s invasion of Ukraine. How should the Fed respond? Inflation is already alarmingly high and labor markets are extremely tight. The central bank can’t do anything about the global crisis and elongated supply bottlenecks, but it must begin to raise rates and take away the accommodative monetary policy that is fueling underlying inflation and rising inflationary expectations.
The U.S. economy is well-positioned to absorb the Russia-Ukraine supply shock and keep growing without recession. The biggest concern is higher inflation and the risk that it persists, not the possible hit to confidence. Raising rates persistently at every Federal Open Market Committee meeting will leave borrowing rates far below inflation and won’t harm consumer spending. Financial markets expect the rate increases and won’t be jarred.
Continue reading the entire piece here at The Wall Street Journal (paywall)
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Mr. Levy is chief economist, Americas and Asia at Berenberg Capital Markets LLC, and a member of the Shadow Open Market Committee at the Manhattan Institute. Mr. Richard is a former managing director of Morgan Stanley and is a retired professor from the University of Pennsylvania’s Wharton School.
This piece originally appeared in The Wall Street Journal