There Are Better Tools To Tame Inflation Than The Fed’s Interest Rate Hikes

In May, inflation abated a bit and gasoline prices fell 19% — that should feel good at the household level.

Inflation is mending and the general sentiment is that the Federal Reserve rate increases are on hold.

What’s Your Inflation Language?


How you refer to the current period of price hikes can signal what you believe causes inflation.

Say “Demand Inflation” and you are probably on the team that believes that government income supports and labor power raises wages and consumer demand so much that firms must and can raise prices. But when real earnings are falling – not keeping up with prices — demand inflation must not be the whole story.

Do you point to greedy corporations and say “Excuse Inflation” and “Greedflation?” You might be among those who believe corporations are gouging and pushing up prices – but there is no evidence they got any greedier than they were three years ago.

If you use the more refined term, “Seller Inflation” you may be reading rising-star and University of Massachusetts Economist Isabella Weber who got slapped down by a male – (inflated) ego – Twitter sphere when she suggested last year that policymakers revisit price controls and strategic reserves instead of using the Fed’s too-broad and indiscriminate interest-rate tool to slow inflation. Paul Krugman was one of the few people gracious and humble enough to apologize.


Ultimately, today’s inflation is caused by a mixture of both “too much demand” and “too little supply” of grain and energy because of the Russian invasion of Ukraine.

Capital markets are softening. Corporate profits fell. Though profits soared in the postpandemic recovery, they have now fallen to more than $10 billion (adjusted for inflation) in first quarter of 2023, down from more than $13 billion (adjusted for inflation) in the second quarter of 2023.

And labor markets are softening, too. Real wages and quit rates are starting to fall. ZipRecruiter’s latest survey ofrecently hired workers found only 65% increased their pay and that signing bonuses are lower. Fewer workers are switching industries (down to 51.8% from 54.5%), and more are planning to stay in their jobs for at least five years.

What Should The Fed Not Do?

Now people are listening to the idea that the Fed has been too fast and too hard in rapidly raising interest rates. A series of 10 hikes in 19 months has been the largest and fastest-paced set in four decades. The interest rate shock caused unexpected bank fragility and a liquidity crunch. The Fed aiming its firepower at workers instead imploded Silicon Valley Bank’s balance sheet, causing a rash of bank collapses in March.


But who’s at fault? We, the public and lawmakers, set the Fed up for failure. The Fed has a clumsy set of tools and we expect it to perform delicate economic surgery in balancing prices and employment. Instead, the Fed needs a break from raising rates and more encouragement and resources to do more bank regulation and examinations.

Non-Fed Tools To Fight Inflation

Since the Fed has limited tools to fight inflation, the nation and world need other mechanisms.

One option is building strategic grain reserves, like we have with energy. Since much of food inflation is caused by grain prices, then a grain reserve would serve the same function as oil reserves—releasing calories to lower prices in the face of shocks and unacceptable levels of food insecurity. Price volatility of major grains (wheat, rice, and corn) is typical, especially when stores of grain dwindle. After 2007, importers built strategic reserves to distribute calories to the most vulnerable people in severe emergencies.


We also need to pay attention to the spike in rents and build more housing.

The May 2023 CPI inflation report was a big relief. Maybe we are in for a soft landing after all.

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