Now Is No Time to Raise Interest Rates
With year-to-year inflation now at 40-year highs, part of the debate is settled: Inflation is higher and longer-lasting than the Federal Reserve or the Biden administration expected. That they and so many other economists failed to anticipate the inflation we are seeing creates a worrying air of mystery. If we don’t understand why inflation is so high right now, wouldn’t it be prudent to begin hiking rates? The reality is that the inflation mystery is not so mysterious, and should have been expected. Once you understand the why, a strong case can be made that the Fed should not panic—and stick to its plan to keep rates low.
Three main factors have driven inflation over the past year: fiscal stimulus, , and . All three of these will dissipate over the next year or two. What is required, then, is not prudence but patience.
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