The Federal Reserve’s move to increase interest rates by 75 basis points will not only impose significant costs on the economy, it will do so needlessly. It won't reduce inflation, but it will add to political and social instability.
The key skill of a central bank in the current environment is identifying inflation generating sectors and providing targeted, anti-inflationary support to the rest. There are a number of ways to do so, but, given the capture of the Fed by financial institutions, we do not expect them to be familiar with these techniques. (We suggest they review our Maternal Mortality Reparation Facility for Black Women at https://www.prlog.org/12876083-maternal-mortality-reparation-facility-for-black-women.html and our proposal to create a $50 billion-dollar Black Bank financing facility, outlined in Black Enterprise Magazine on October 21, 2019, online at https://www.blackenterprise.com/black-banking-crisis-economist-offers-50-billion-solution/).
We continue to believe that the recent inflation spike is due to fear and greed-based labor and supply chain disruptions resulting from the unprecedented and ongoing COVID crisis. This is confirmed by the fact that corporate profits are at record levels. In authentic inflation episodes, neither corporate profits nor private sector wealth are as elevated as they are now. These entities suffer along with the rest of the economy. Further, to control inflation, the Fed needs to reduce corporate tendencies to raise prices. An analysis revealing who these firms are is available and easy to produce.
Rather than subject the whole of the economy to costs associated with higher interest rates, the Fed should increase rates only on financial institutions and corporations most responsible for inflation. The Fed will also need to prevent them from passing price increases onto consumers by promising further targeted rate hikes if they do so:
The broader issue is the inefficiency of monetary policy, confirmed by the creation and broad acceptance of digital currency. Despite having shown an ability to provide support to selected firms via the creation of several credit financing facilities (the Primary Market Corporate Credit Facility, the Secondary Market Corporate Credit Facility, the Paycheck Protection Program Liquidity Facility, the Main Street Lending Program, the Term Asset-Backed Securities Loan Facility, the Municipal Liquidity Facility and the Temporary Foreign and International Monetary Authorities Repo Facility) to aid the implementation of monetary policy, the Fed is unable or unwilling to apply this tactic to this use case. This is consistent with their past behavior.
In 1994, we suggested the Fed purchase mortgage-backed securities issued by Black owned banks as a way to address housing inequality while enhancing the impact of monetary policy, a suggestion the Fed ignored until majority-owned banks could profit. In 1995. we suggested the creation of the Community Reinvestment Act (CRA) investment test as a way to evaluate community development performance, another suggestion that was ignored until non-Black firms could profit. We understand the desire to use old, inefficient monetary policy tactics. After all, the institution is comfortable with these old methods. The environment and risks have changed significantly, however, and reliance on these old ways will foster increased social volatility.
Our economic forecast shows a period of increasing global political instability. Reducing this will be critical.
The real risk is not inflation: it is civil war.