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Opinion | Inflation Keeps Getting Worse. But Can the Fed Really Rein It In?

“The Fed and other central banks may be about to make a hawkish mistake,” he writes in his newsletter, Chartbook. “Inflation right now is not principally in the service sectors. It is in durable goods subject in the main to longer-term forces like globalization. A broad monetary policy squeeze may be a high cost, low return proposition.”

Indeed, the return could even be negative. “In a context where supply-side bottlenecks are major contributors to the price problem, raising rates could actually make things worse,” New York magazine’s Eric Levitz wrote in October. “We need more car production and home construction, not less, if we want to reduce prices in the vehicle and housing markets. Yet if you make it more expensive for carmakers and construction firms to borrow, you are going to reduce supply in those sectors.”

Raising interest rates is not the only tool at the federal government’s disposal for controlling inflation. To combat the bullwhip effect, for example, The Times’s Peter Coy, citing Shin, writes that the Biden administration could do more to facilitate communication across companies so they can better understand which orders reflect genuine demand and which reflect “phantom” demand.

“We typically don’t think about public authorities going in and directing resources on the real side of the economy,” Shin said. “It’s a fine line. You don’t want to be in there shifting boxes of goods here and there. But to facilitate, that’s entirely legitimate.”

Congress might have a role to play, too. Insofar as reduced labor force participation is contributing to inflation, it’s not a problem that the Fed alone can solve; Congress also needs to find ways to encourage people to get back to work.

In the view of Michael R. Strain, the director of economic policy studies at the American Enterprise Institute, that would entail more narrowly tailoring the White House’s social spending bill that’s currently tied up in the Senate.

“President Joe Biden’s Build Back Better agenda includes a laudable expansion of federal earnings subsidies. By increasing the financial reward for working, these subsidies draw people into employment,” Strain writes. “But the proposal is temporary, an attempt to make room for other programs that will do less good for workers. Congress should refocus Build Back Better on a few urgent problems, including work force participation, rather than take the scattershot approach the bill currently uses.”

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