If you agree with the idea that current inflation is largely due to supply chain and energy cost issues, then the question that you need to ask is.. What would raising interest rates do to decrease energy costs and fix the supply chain? And other than causing a recession and thus dramatically lowering demand, the answer is nothing.
The next question is.. What can we do to address supply chain and energy cost issues? Energy, IMO, is not that difficult. Supply chain is a bit more complex.
Either discussion would likely lead to NTR territory, so I'll leave it at that.
It may be heresy to those who think the Fed is all-powerful, but the honest answer is that raising interest rates wouldn’t put out the fire. Short of throwing millions of people out of work in a recession, higher rates wouldn’t bring supply and demand back into balance, a necessary condition for price stability.
I will argue that raising int rates will tame inflation. I hope this results in some debate for both sides of the question you have raised
You mention supply chains and energy as the main drivers of inflation
I could add a lot of other stuff that causes inflation such as house prices etc but I suppose supply chains for house materials is the root cause of higher house prices, if the speculation part is removed from the equation
So: Lets say int goes up to 8 % for a consumer line of credit. That might be a Fed rate of 4 1/2 %. IDK if that happens but will have to be that high to do any good. Maybe the line of credit will be used for needed repairs to the existing home. Now some may decide to post pone some repairs as the cost suddenly increased. Let's say the home owner replaced the roof and called that enough. Suddenly you have reduced demand for building materials. Just one example of reduced supply chain demand
Now Gov. Desantos in Florida wants to encourage a chip plant in Florida. I think he is thinking way ahead of other Gov and doing the right thing for his people. Gotta give the man credit for thinking what is needed in this country
But when all the permits etc are in place suddenly int rates have gone to 10 % for such a long term loan and the time lapse for permits and int going up ever so slowly but up we go. The Fed isn't going to raise too quickly but will continue to raise until inflation slows down or else the Fed is blowing hot air. This debate assumes the Fed actually wants to control inflation which may be another debate, but we have to assume some things.
Can a chip manufacturing plant compete with cheap labor and produce chips. What will the market pay for chips if off shore suddenly is able to get the work force back and going again. Obviously there were enough chips before covid, why not after covid, and golly 10% int makes it that much harder to compete. Suddenly higher int rates may have cancelled the chip production profit in Florida as demand is met with off shore production, once everybody is back to work. Maybe back to work, as before covid, is debatable, but will the lender take the risk???
So you see:
Higher int rates can reduce demand in supply chains in many different ways
The same for energy.
Higher int rates can drive the cost of energy higher. Higher prices mean fertilizer plants are shut down for a lack of a market. Farmers cut back on fertilizer useage which is possible and some can cut back for 10 yrs or more as the soil bank is high in nutrients, waiting to be used when needed
During the oil embargo Jimmy Carter tried to encourage turning the house temp down. A one or two degree drop in house temp across the USA would save a lot of energy. Especially if it costs an arm and leg, you can cut energy consumption a lot. You drive less miles. When you buy groceries you buy for a week instead of a couple, three trips to buy groceries. You stop going on vacation, which means less air plane or driving trips
So just a few examples of why higher int rates cause higher energy prices and less useage of high priced energy
I rest my case and give the floor to others
If you read the article I linked, you'll see that debt, consumer and commercial, is not on the rise at any appreciable rate.
Yes, higher rates will lower demand, but the argument I am making is that demand is not over heated. Rather, that supply is contrained. So, in the supply/demand equation, it's supply that is driving inflation. Higher interest will do anything but stimulate supply.
I would add that job creation over the last several months indicates anyhting but an over heated economy.
From acritical above
"Maybe it’s time to rethink how we try to manage the economy by giving more of the responsibility for controlling inflation to fiscal and regulatory policy makers, who can at least design their policies to aim at the target."
Thats what got us into this situation. Lockdowns, Mandates, poor fiscal policy cut supply and unbalanced the economy.
Some actually qualified "fiscal and regulatory policy makers" could have avoided a lot of the problems we face right now. Most of the decisions made in reaction to the "pandemic" did not take fiscal/economic policy into account at all. Quite the contrary. Economic impact appeared to be of the least concern which is why we currently see ourselves on the precipice.
It's a pretty good article. Interest rates have been stuck near 0 for so long that most of us don't even remember when they mattered. To doubt that monetary policy will matter much for inflation or recession is just to admit what we've seen the last 10 years.
There will be another recession, because there always is. Lots of other ways to kick it off, no good way to say when or how. If I had to guess, it would be
Colonel Plum, in the kitchen the sudden collapse of a trillion dollars in cryptocurrency wealth. As usual, something that develops slowly and happens quickly.
I don't know if this enters the debate or how but here goes what I may add to the debate. Don't know if I am on coarse or completely in left field. But I just have to add this part
It seems that some think the Biden administration is happy with high pump gas prices. I can't remember the names of your congress people but the person who holds the record for longest floor speech. Not Nancy Pelosie, that record fell when this congress person spoke against the BBB bill proposal.
Any how he was questioned by Breibart and it is his opinion about high gas prices.
His thinking is if gas is too expensive then people will be forced to buy EV simply because of economics
Golly the person is Kevin McCarthy tks to Google
Of coarse he doesn't agree, with the Biden administration and thus the BBB bill has/had a lot of money tucked away in it, for a green agenda
So: Would the BBB act foster inflation ??
One would think so when gas is over 5.00/gal in CA and a Tesla is 50,000 plus
However int rates did not have any thing to do with gas price
I suppose my part of this post is to say that it seems so much is causing inflation and the Fed is telling us they want to stop inflation
Personally I think the Fed will cause a recession and back off their efforts to tame inflation, but that is just my opinion
The Fed is boxed in and most any thing they do will lead us to disaster
We need some bad tasting medicine to tame inflation
Will the Fed follow thru with the bad tasting medicine
That remains to be seen
And a shout out to Tim for starting this important debate, even if we lose our focus a bit to the original link, it is all important
Any more thoughts are welcome, no matter what you have to say
BBB would inject more money into the economy, from thin air, while increasing the cost of traditional energy, AKA, fossil fuels. In other words, exactly what we don't need right now. But that's par for the course. Most of the Biden policies are "exactly what we don't need now", as they throw more gas on the inflation fire.
I have tried to make the argument that higher int rates would stop inflation from increasing and possibly inflation would start decreasing
That has been the conventional wisdom for past inflationary times, especially when we consider the 1970 and 1980 time frame for an example, most of us can relate to.
But this time IS different Every time has it's small or large differences
1st: I don't think the Fed will raise int to 20% for consumer loans. I don't think it is possible for the Fed to raise int rates sufficient to tame inflation. I believe in late 1970 or there abouts inflation was approx 7 % and int was 8 %. with a much stronger economy. This time the Fed is starting from 0 int rates, inflation at 7 % [depending on how you measure inflation] and a debt closing in on 30 trillion. The numbers just don't add up to do what Volker did. If the Fed sent int rates high enough to tame inflation we would have one grand daddy of a depression
2nd; This time is different because we import so much of our consumer goods. We are not the manufacturing hub we were in 1970. You all know about the port congestion. Why do you think that is. Because we want our stuff now. So we will pay for scarce goods. Inflation is always money chasing scarce some thing.
This time it is supply as Tim has told us
The Fed can not print supply nor can they slow down demand with int rates with out sending us over the cliff
Tim is 100 % correct