Kuttner on TAP: The Federal Reserve’s Overkill

The Fed’s decision Wednesday to raise short-term rates by another three-quarters of a point, and its signaled intent to keep raising rates, flies in the face of evidence that inflation is already subsiding and that supply chain bottlenecks—the main driver of price increases—are easing.

Used-car prices, which spiked during the pandemic because of new-car production bottlenecks, are way down. Lumber prices are also down dramatically. Housing costs, a big driver of inflation, are moderating. Rental prices are actually trending down.

Wages are certainly not driving inflation. As Josh Bivens of the Economic Policy Institute points out, “Average hourly earnings from the Current Employment Statistics (CES) data compiled by the BLS have grown at an average annualized rate of 3.6% over the past two months. This is down significantly relative to mid-2021.”

Bivens adds that this is a pretty normal pace of wage growth and is consistent with the Fed’s goal of 2 percent price inflation over the long run. For an excellent summary of the state of inflation, see Bivens’s overall analysis.

Meanwhile, Paul Donovan, the chief economist at UBS Global Wealth Management, not exactly a Bolshevik outfit, writes in the Financial Times that corporate windfall profits are a prime driver of inflation—as the Prospect and our friends at the American Economic Liberties Project and the Open Markets Institute have long been pointing out.

Inflation hawk Larry Summers, a champion of the tortured metaphor, argues, “When a doctor prescribes antibiotics, the worst thing you can do is stop taking the moment you feel better. It’s a mistake to not carry through.” A better use of this metaphor is the caution that too much medication can kill you.

Inflation is already subsiding. The Fed’s zealotry could turn a soft landing into a needless recession. Fed Chair Jay Powell should stop behaving like a reformed sinner who belatedly got religion and start taking a closer look at the evidence.