The Fed’s Anti-Inflationary Monetary Policy: Archaic, Ruinous, and Unfair

The Fed’s policy is archaic because it is based on the outdated notion that inflation is caused by too much money chasing too few goods. In reality, inflation is caused by a variety of factors, including supply chain disruptions, rising energy prices, and government spending.

Despite the initial injection of trillions of dollars into the money market by governments worldwide to combat the economic consequences of the pandemic-induced shutdowns, the Federal Reserve has chosen to restrict private sector access to credit while keeping it readily available for the government, the primary source of inflation. This article aims to shed light on the flaws in the Federal Reserve’s approach and propose an alternative strategy that could promote economic growth, innovation, and reduce inflationary pressures.

1. Government-Initiated Inflation

In response to the economic fallout caused by the pandemic, governments injected massive amounts of money into the economy, totaling nearly five trillion dollars. This injection served as a necessary remedy for the ill-advised decision to shut down the economy. However, such an influx of money led to an inflationary environment, eroding the purchasing power of individuals and creating economic imbalances.

2. Misguided Restriction of Private Sector Credit

While the Federal Reserve recognizes the inflationary risks posed by excessive liquidity, their response of tightening credit access primarily for the private sector is misguided. By restricting private sector credit, the Federal Reserve fails to address the primary source of inflation — government spending. Government expenditure, fueled by deficit spending, remains unchecked, leading to further inflationary pressures.

3. Ineffectiveness of Rising Rates

The Federal Reserve’s strategy of raising interest rates to combat inflation lacks efficacy. The technical adjustment of debiting and crediting treasury bonds and bank accounts does not effectively restrict the monetary mass. The excess liquidity remains within the system, waiting to be unleashed as soon as the Federal Reserve signals a dovish stance. This cycle perpetuates inflationary pressures, rendering the rate hikes ineffective in curbing inflation.

4. Inability to Influence Non-Core Inflation

The Federal Reserve’s efforts to control non-core inflation, such as rising food and energy prices, are limited due to growing geopolitical divides. Factors such as geopolitical tensions, supply chain disruptions, and resource limitations significantly impact these prices, and the Federal Reserve’s actions have limited influence in mitigating these inflationary pressures.

5. Monopolistic Corporations and the Burden on Consumers

Contrary to their intended purpose, rising rates set by the Federal Reserve increase the cost of running businesses for monopolistic corporations. These corporations, facing increased borrowing costs, simply pass on the burden to consumers, effectively fueling inflation. Consequently, the Federal Reserve’s actions contribute to the inflationary environment rather than containing it.

6. Suppression of Wage Growth and Social Injustice

The Federal Reserve’s active suppression of service-side inflation prevents salaries and wages from catching up with rising prices, resulting in social injustice. This approach disproportionately affects low-income workers who struggle to make ends meet, leading to social tensions, as evidenced by recent protests in countries like France. Failing to allow wages to keep pace with inflation exacerbates income inequality and deepens social divisions.

A Proposed Alternative Approach

To address the shortcomings of the Federal Reserve’s current policy, a revised strategy is needed. Instead of tightening credit for the private sector, the Federal Reserve should maintain low-interest rates for banks while sharply raising rates for governments. This approach would make the galloping expenses of governments unbearable, encouraging fiscal discipline and responsible spending. In turn, this would create an environment conducive to entrepreneurial activities and foster competition, leading to the production of new, cheaper products and a reduction in inflation.

Conclusion

The current anti-inflationary, hawkish monetary policy pursued by the Federal Reserve is flawed, economically detrimental, and socially unfair. The focus on restricting private sector credit, while maintaining readily available credit for governments, fails to address the root causes of inflation and perpetuates the problem. To foster sustainable economic growth, the Federal Reserve should adopt an alternative approach that encourages fiscal responsibility, supports entrepreneurial activities, and allows wages to catch up with rising prices. By pursuing these measures, the Federal Reserve can contribute to a more equitable, innovative, and inflation-controlled economy.

For Weekly Macroeconomic Insights – check Svet’s Weekly Market Update

Evernomics.com — Digital Wealth Growth Intellectual Contracts Platform — is the way to invest into your future without hassle.
For more on Evernomics: https://evernomics.com/