Stop the Fed from Harming the Economy
By Joel D. Joseph
Hippocrates declared that doctors should "irst do no harm." The Hippocratic Oath should also apply to the Federal Reserve Bank. Doctors first diagnose a disease and then prescribe a course of treatment. Similarly, the Federal Reserve diagnoses the economy's illness and provides an effective a course of action. The Fed is committing economic malpractice and violating the Hippocratic Oath by overprescribing interest rate hikes as its alleged cure for inflation. This alleged cure is far worse than the disease.
Raising interest rates will not bring down inflation, except concerning real estate prices. If the Fed continues on its wayward path of raising interests rates, it will drive the U.S. economy, and the world economy, into a recession.
Unfortunately, the Fed doesn't have the tools to reduce inflation in the short run. Monetary policy works (in theory) by adjusting demand, but it has no direct impact on supply. Supply chain problems, from grain to computer chips, is a primary cause of inflation now.
In addition, it has become evident over the past few decades that the Fed "has much less control over spending (and therefore inflation) than is commonly believed," as economists Dimitri Papadimitriou wrote in a recent policy document titled, "Flying Blind After All These Years."
The most effective anti-inflation measures are not within the control of the Federal Reserve Bank. To control inflation, we must first end the Covid pandemic, end the war in the Ukraine and solve supply-chain problems. The U.S. government can fight inflation by monitoring and improving supply chains, as it is doing with infant formula. The government can use the Defense Production Act to require corporations to ramp up production of key products in order to overcome supply chain bottlenecks.
The Justice Department and the Federal Trade Commission can also enforce antitrust and price-fixing laws against oil companies and other large corporations who are using their market power to increase prices and profits. Some prices, including gasoline, have been rising faster than their costs justify.
As long as the Ukraine War drives up energy and food prices, the U.S. government can only help by reducing taxes on gasoline and diesel fuel, and by enhancing the food stamp program.
Concerning food products from the Ukraine, the U.S. can help to enforce an agreement to allow the Ukraine to ship food products out of its ports without interference from the Russian Navy. The Russian government claims that the "Black Sea Initiative" will be finalized soon. Russian officials said, "Russia has proposed measures to ensure the transportation of food to foreign countries, including Russian partners, to rule out the use of supply chains to supply the Kyiv regime with weapons and military equipment, as well as to prevent provocations." Russia, Ukraine, Turkey and the United Nations are close to signing an agreement soon to resume Black Sea grain exports from Ukraine, which have been severely hampered by the war there.
The U.S. Navy, and other NATO warships should increase their presence in the Black Sea near Odessa so that the Russian Navy keeps its distance and ensures that this accord is peacefully implemented.
If this Russian-Ukrainian agreement is effective, grain prices, bread prices, cooking oil prices and food prices in general will start to come down. The Fed cannot do anything about food prices when the war in Ukraine is the primary cause for food inflation.
