**The Courage Required to Confront Inflation**
**By The Editorial Board, The New York Times, April 29, 2022**
**Jerome Powell, the chair of the Federal Reserve, has often expressed admiration for the resolve exhibited by one of his predecessors, Paul Volcker, who was willing to crash the economy in the early 1980s to drive down inflation....**
**The present moment requires a different kind of courage. Instead of reprising Mr. Volcker’s shock-and-awe tactics, the Fed needs to pursue a more measured approach, one that would bring inflation under control without sending the economy into a deep recession....**
**The Fed’s benchmark rate would need to rise to somewhere between 2 percent and 3 percent to reach a level at which it is neither stimulating nor restraining growth. ... The central bank’s decision to raise interest rates can curb demand; supply shortages, on the other hand, are best endured patiently. The Fed’s decision in the week ahead won’t ease them....** [end quote]
This editorial states flatly that the fed funds rate would need to rise to somewhere between 2 percent and 3 percent to reach a level at which it is neither stimulating nor restraining growth – that is, a so-called “neutral rate.”
Nobody really knows what the neutral rate is at this point so the N.Y. Times editorial board is talking through their hat. The Fed maintained a fed funds rate of around 2.5% during the successful 1990s, when the economy was strong, inflation was controlled at about 2% and employment was good. But after the 2000 stock bubble popped, the Fed cycled through periods of zero rates followed by raising the rate until they cause a recession.
You would think that they would have noticed this harmful pattern.
Instead of cutting the fed funds rate so fast and low, they should have backed off moderately and let the economy come to equilibrium even if it meant a few more months of recession. They should not have held rates at zero (or very low) after the recession ended. That only caused the markets to become addicted to free money.
As long as the fed funds rate is below the inflation rate, the real rate is negative. That is not “neutral.”
The Times is right that inflation which is caused by a supply/ demand imbalance can’t be helped by the Fed. The Fed’s meddling mostly impacts the prices of assets, such as stocks, bonds and real estate.
The Fed’s money pumping grossly inflated asset prices. If they truly change the fed funds rate to neutral (2.5% above the inflation rate) and dump their “emergency” long-term debt buying, asset prices will plunge.