The Federal Reserve is the only institution in the US with an official mandate to maintain stable prices. Even so, the Fed is not the only institution we need to help fight inflation, especially given the supply disruptions from the pandemic and the war in Ukraine.
The Fed, by raising interest rates, can push down demand, but it cannot push up supply. And Adam Shapiro, an economist at the San Francisco Fed, estimates that about 40 per cent of inflation is supply-driven, 40 per cent is demand-driven, and the other 20 per cent is ambiguous. Given that reality, the Fed alone cannot get inflation back to the 2 per cent target.
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Sure they can. A Volker-sequel response would tamp it down to practically zero. The human cost would be staggering, of course, and I am not advocating it, just taking issue with the argument.
And frankly I don’t see a way that any other agency - or corporation - or industry sector is positioned in a way to affect it whatsoever. Do you?
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I have always questioned this arbitrary 2% inflation target that seems to have no relation to the strength of the US economy and the US consumer.
I think the US consumer can and will tolerate a 3-4% inflation rate…that is likely to become the new norm in 2023 and 2024.
The shift of more manufacturing back to US shore will also likely keep prices a bit higher than historical norms.
Oh and yes the US Fed can impact both demand and supply.
- Raise interest rates
- Demand goes down
- Inventories rise
- Factories make less stuff
- Supply goes down
Economics 101
Beachman
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EXACTLY. One reason I have not flipped out about inflation so much is simple. If returning manufacturing to America was going to happen it WAS going to be inflationary. Seems to me we were going to get inflation, one way or another.
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Supply is based on demand. Supply can not alter demand. What CAN (could) happen is an over-supply can drop its price so far as to make it a cost-effective substitute for what would normally be used.
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This.
Of course the Fed can tamp down inflation on it’s own. It’s better if both the Fed (monetary policy) and Congress (fiscal policy) work together to reduce inflation. But either can accomplish it on its own. And only the Fed has a mandate to keep inflation in check. Congress doesn’t.
–Peter
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Actually the FED can not do anything to bring down inflation for the longer run.
Only the US/Mexico exporting manufactured goods as a global deflationary force will solve this.
Fortunately there are people with low IQs still inline to give tax breaks to the other guy who would never talk to people with low IQs. Sarcasm
We can either grow up and apply the right tax concepts, the right economic principles to grow our GDP and be decent human beings or we can wallow in how stupid a minority of us truly have been in the 1981 to 2020 period.
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No input from production capacity? If that were true there never would be famines. Tesla would be selling twice the number of EVs!
Supply and Demand is a compex dance.
The Captain
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Neither is true. The FED does not change the demand, you change the buying power known as demand by reducing the money supply. The FED changes the corporate planning by altering the IRR. As rates go up the IRRs show fewer corporate projects will be profitable.
In the longer run higher rates mean the IRR are perhaps more efficiently distributed to projects that make more sense. There can be an optimalization.
Nope. Demand is everything. If demand is HIGH (and ongoing), then the producers can consider adding additional permanent capacity because the demand is ongoing, which justifies the investment. Otherwise, why bother?
The irony here is supply side econ feeds demand. Demand side econ feeds supply.
Meaning a capital policy is cronyism and demand from the rich. An industrial policy is factories or helping the supply. Monetary v Fiscal.
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The above statement makes no sense.
Supply-side economics drives production regardless of demand, because that is the fundamental purpose of supply-side economics. ANY benefits to anyone else are merely coincidence.
Demand-side economics incentivizes producers because the producers see “more money from customers” if they produce more.
Demand-side econ is based on customer demand for an item.
Supply-side econ is based on govt subsidies regardless of demand.
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Jerry,
Dont do your famous digging in no matter what and listen.
“In practice” supply side econ in monetary policy driven. “In practice” demand side econ is fiscally driven.
Monetary policy from 1981 to 2020 favored the rich yes they are producers but they offshored their production and lived high off the hog. Fiscal policy was scorned.
Since then fiscal policies in particular the IRA are creating the infrastructure for a retooling of America. The infrastructure was left to rot from 1981 to 2020. A growing industrial base needs the federal government to support it with the infrastructure. Infrastructure can include higher pay for workers and better benefits from the government.
The real GDP growth from 1949 to 1980, the last demand side period, saw 5% or better for 12 out of 31 years.
The real GDP growth from 1981 to 2020 only saw one year with better than 5% growth out of the 40 years.
The reality is industrials do more and better in the US with demand side econ.
Now you can and will say it is about better pay. It certain is. But that is where the dancing begins between supply and demand as the pump gets primed.
More importantly the fiscal policy creates a better dance floor.