Inflation follies

Jen Harris dissects the counterproductive Fed effort to fight inflation:

The Federal Reserve’s handling of inflation is souring the public on our economy, harming vulnerable Americans, slowing our fight against climate change — and hindering the fight against inflation itself.

For the past several months, the Fed has resisted lowering interest rates in an environment that clearly demands lower rates. Take its favored inflation measure, the Personal Consumption Expenditures price index. The Fed repeatedly stated that it would not lower rates until it had confidence the P.C.E. was headed back toward 2 percent. Yet we are already there: While the annualized P.C.E. stands at 2.5 percent, the three-month annualized P.C.E. is just 1.5 percent….

The inflation that has plagued both the United States and Europe since 2021 has come substantially from so-called supply-side factors, or shocks hampering the economy’s ability to churn out goods: a pandemic that closed plants, wars that raised prices of grain, climate change-induced crop failures that did the same, Houthi rebels launching drone attacks on one of the world’s busiest maritime choke points and so on. For many of those supply-side woes, higher rates are making matters worse. “The Fed’s main tool for lowering inflation,” as economist Mark Zandi told The Atlantic, “is actually doing the opposite.”

Consider housing. Rental housing recently accounted for an estimated two-thirds of the inflation above the Fed’s 2 percent target. The fix for too-high rents is to build more housing. Yet interest rates that push mortgages to historic highs are extremely counterproductive for new housing starts, because they make it more difficult and expensive for builders and developers to bankroll new construction.

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