Opinion | Here’s a better way to slow the economy


Sebastian Mallaby, in his Oct. 14 column, “Why the Fed must double down against inflation,” argued that the Federal Reserve should keep raising interest rates because “however real the risk of excessive tightening may be, the opposite risk is more frightening “.

He’s totally wrong. The danger of tightening too quickly is great. The last time the Fed tightened so quickly, under Paul Volcker in the early 1980s, it plunged the economy into a deep recession.

There is a lag time between when the Fed raises interest rates and when those rates slow the economy down. So it’s important for the Fed to pause now and see if it’s doing more good than harm.

Even if the Fed’s rate hikes slow the economy, it’s far from clear that they will have a big impact on inflation.

Current inflation is worldwide, mainly due to post-pandemic global demand exceeding post-pandemic supply. (Energy and food prices have risen in part due to Russian President Vladimir Putin’s war in Ukraine; component costs are higher due to Chinese President Xi Jinping’s lockdowns.)

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That’s also because big companies are raising prices to achieve near-record profits even as their own costs begin to fall.

Fed rate hikes will not affect these forces unless they make the US economy crawl, at which point their human cost will be overwhelming.

Better to wait out the global supply shocks and deal with corporate power with a temporary windfall profit tax and tougher antitrust enforcement.

Robert B. Reich, Berkeley, California

The author is a former Minister of Labour.

The hawkish headline in Sebastian Mallaby’s Oct. 14 column belied his dovish conclusion: that the Fed should raise its long-term inflation target of 2 percent. He was right.

The Federal Reserve Act directs the Fed to manage the money supply “consistent with the economy’s long-term potential to increase output to effectively promote the goals of maximum employment, stable prices and moderate long-term interest rates.” The Fed refers to this as a “dual mandate” – merging the latter two goals on the basis that stable prices will lead to moderate interest rates. But that logic breaks down when interest rates fall to levels that can no longer be considered moderate.

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Very low inflation means very low interest rates. But as Mr Mallaby wrote, low interest rates can limit central banks’ ability to fight recessions. In addition, low interest rates artificially raise financial market prices and increase wealth inequality as assets grow faster than incomes. You also waste capital. And they enable leveraged financial speculation that increases volatility and systemic instability.

To fulfill its statutory mandate and for equity and financial stability, the Fed should raise its long-term inflation target to a level consistent with maintaining moderate long-term interest rates.

Unless the so-called experts can show, at a granular level, exactly how higher interest rates lower the cost of food, gas, electricity, clothing and housing, such opinions should not be given further space.

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Take housing, which happens to be my area. Rate increases mean that costs to the consumer have increased, while sales price increases are said to be slowing. The spring market’s $500,000 home could sell for as little as $475,000, but the buyer is paying significantly more per month thanks to a doubling of the interest rate. Down 10 percent, the payment goes from $1,899 to $2,701 at today’s rates.

In addition, Fed policy will contribute to a greater shortage of homes in the market: Anyone who bought at a 3 percent interest rate in the past five to seven years is unlikely to move and make a new purchase at 7 percent unless , its circumstances make it urgent or absolutely necessary. The main reason housing costs have skyrocketed is because we have a deficit of 5 million units nationwide. Tightening credit for builders will only exacerbate a problem that has existed for more than 10 years.

So either prove how it works or please stop.


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