Opinion | The Fed is keeping inflation in check. Politicians want to make it harder.

SAN ANTONIO — Inflation has plummeted and a much-needed “soft landing” is within our sights. We have the Federal Reserve largely to thank for this. But misguided politicians on both the left and right are once again undermining central banks’ ability to accomplish this feat.

The standard measure of inflation rose to nearly 9% in 2022, but is now just shy of the Fed’s 2% target. Meanwhile, the unemployment rate is near historic lows. The recession that many predicted and feared has not materialized (nor is it generally expected in 2024).

Left-wing politicians and their advisers have won victories over this record. This is strange, given that government officials have rarely adopted the tools recommended by these maverick thinkers. That is, rather than introducing bizarre punitive measures targeting “corporate greed” (like (price controls, windfall profits taxes, bans on stock buybacks, etc.), the government’s main way to tackle inflation was the boring old policy that the left opposed: raising interest rates at the Fed.

While this was happening, populist politicians admonished the Fed.Some, such as Sen. Elizabeth Warren (D-Mass.), believe that central banks I’m trying putting people out of work. The implication was that the recession was not a possible unintended consequence of rate hikes, but rather a deliberate “plan” to hurt defenseless workers.

Some in this populist wing continue to blame the Fed. For example, Rep. Ro Khanna (D-Calif.) said: recently tweeted Federal Reserve Chairman Jerome H. Powell insisted that interest rate cuts must begin immediately. “If he doesn’t,” Khanna warned. [Donald] Mr. Trump. ”

This clear link between monetary policy decisions and partisan outcomes is similar to the rhetoric deployed by Trump and his candidate. It’s dangerous if you come from the right, and it’s dangerous if you come from the left.

There are multiple possible reasons why inflation has slowed in recent months. Some of this is likely to have happened naturally, such as the untangling of global supply chains. However, the Fed’s ability to maintain its political independence and (crucially) seen as such.

The first factor related to the Fed is obvious. Rising interest rates directly “cooled” demand. They made it more expensive for people to rent to buy new things (like cars and houses).

Raising interest rates is usually unpopular because it is a blunt measure that can cause collateral damage. All the recession warnings were pointing to that. There’s a reason why the painful and difficult decision to raise interest rates is left to technocrats, shielded from short-term electoral consequences, rather than, say, Congress. It’s a difficult drug and not everyone has the stomach to administer it.

But surprisingly, FRB’s treatment appeared to be more effective than expected, meaning it had relatively few side effects.

why? This brings us to his second major contribution to the Fed: Inflation Expectations..” Even though inflation itself was rising in real time, long-term expectations for inflation were future Inflation was relatively flat, according to the survey. Fed policymakers remained persuasively committed to controlling inflation, even in the face of a potential recession and an active anti-Fed smear campaign. And because the public believed that, the Fed didn’t have to raise interest rates as much as it should have.

“The subtle way in which the Fed can take credit for some of what happened is because of the expectation that… “It’s fixed,” he said. She said this “probably made a big difference in how much less painful this deinflation episode was compared to previous episodes.”

Think of it this way. If people don’t believe the Fed is working on lowering inflation, companies negotiating five-year contracts, for example, might factor faster price increases into their contracts. In this way, short-term shocks can cause inflation to become entrenched. Expectations become self-fulfilling.

This happens repeatedly in countries without politically independent central banks, such as Argentina. This is why the Fed has had difficulty controlling inflation in the past, even in the United States.

Fed officials in the 1970s lacked independence and were reluctant to administer painful drugs. Fed officials bowing to political pressure, as some historians believe happened when President Richard M. Nixon turned to Fed Chairman Arthur Burns to support the president’s re-election campaign. Sometimes it happened. Ironically, Khanna tried to insult Powell. compare him to arthur burnsOn the other hand, well, the president is counting on Powell to help with his re-election campaign.

In the decades since Mr. Burns’ time, the Fed has worked hard to rebuild its reputation for independence and for doing whatever it takes to fight inflation. That has paid off in his last two years. But imagine a world with worse economic outcomes, like the one where the president installed an incompetent cronies in the Fed’s job, or where Congress twisted its arm to get the Fed to do something more popular. It’s easy to do.

At least in the short term, anyway.

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