| The goal of Fed monetary policy is to contain inflation back down to the 2% target rate. The knob they have to turn is raising interest rates. There's a lot of steps in between that and inflation coming down. Inflation right now has a strong component of rising Labor costs because of low unemployment and workers having strong ability to bargain for higher salaries. To achieve low inflation in the current environment, there must be more "slack in the labor market" which comes about through higher unemployment and less ability for workers to bargain for their salaries. The mechanism that this happens through is by making bad investments that have been funded by loans taken out at very low short rates to fail via higher interest rates and for those effects to ripple through the economy, ultimately destroying jobs. The only problem with the title of the article is that it should have been written "The Fed's plans will sharply boost unemployment". They plan to lower inflation by rising interest rates, but unemployment has to rise for them to hit their targets. I also would bet that soon, as is typical in all recessions (and it never, ever true that "this time it is different") that there will be a financial collapse when the tide goes out and we see who has been swimming naked. |
Inflation causes vary: 1) Covid business loans 2) Cost of logistics post covid 3) Corporate profits recently hit all time high 4) FX rate with EUR and GBP
I agree that the vanilla solution seems to be the most effective - the knob as you called it. But that doesn't mean that it's going to be painless when credit expansion and overleveraged businesses and people are hit with the new higher rates.