The Federal Reserve announced this week it would raise benchmark interest rates by a quarter percentage point with the aim of counteracting the effects of inflation.
CEI Senior Fellow Ryan Young said:
“Inflation happens when the money supply grows faster than real economic output. The wider the gap, the higher the inflation rate. The Fed has by far the most control over the money supply, so fighting inflation is on its shoulders far more than on Congress or President Biden’s.
“The Fed should have started acting months ago to stem inflation. And it needs to take more action than raising the federal funds rate by a quarter of a percentage point. Its massive bond buying program is finally due to wind down this month, which has directly added several trillion dollars to the money supply. This has had more impact than its interest rate policy, which affects the money supply only indirectly.
“The Fed can ease fears of further inflation by credibly committing not to embark on another bond-buying spree, and continuing to raise the federal funds rate throughout the year. Inflation expectations play a role in how companies set their prices, so easing these fears by itself can help keep prices in check. Congress and President Biden can also help fight inflation by spending less. This would make life easier for both the Fed and taxpayers.”