Economist explains implications of Fed’s inflation tactics

Moreover, it will become more expensive for corporations to borrow, and for the federal government and state and local governments to pay interest on their debt, she added. “The concerns of these borrowers, who are favored in an artificially low interest environment, as is the case now, need to be weighed against those of everyone else, she said.

For the average American, the double scourge of rising gas prices and grocery costs is most acutely felt via inflation, she noted. “Higher federal funds rates are needed to end inflation,” she said. “Last year the Fed called inflation ‘transitory,’ and it is still not taking it with the seriousness it deserves. The Fed projects that PCE inflation, now at 6%, will average 4.3% in 2022—up from a projection of 2.6% for 2022 at its December meeting. With inflation increasing, this doesn’t seem realistic.”

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For maximum effect, she noted, President Biden needs to support the Fed by keeping down prices in the economy. “He should encourage energy producers in North America to produce more oil and gas and increase refining, roll back measures requiring high costs of labor in Federal infrastructure projects, and reform regulations to make it easier to produce and invest.”

Historically, the Fed’s traditional measure of inflation lies in the PCE price index, minus food and energy costs, that stood at 5.2% between January 2022 and last year’s comparable period. The level is the highest seen since April 1983. Meanwhile, CPI inflation rose to 7.9% in the 12 months ended in February at a level that has not occurred since 1982.