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Big State Inflation

Throughout 2021, top US economic policymakers held policy positions and deployed political rhetoric reminiscent of some of the darkest episodes of modern economic history. Leviathan is resurfacing, and it is bringing inflation with it.

CAMBRIDGE – One almost had to feel sorry for US Federal Reserve Chair Jerome Powell when, in congressional testimony this September, he expressed frustration at the inflationary pressures affecting the American economy. On the plus side, he finally acknowledged the existence of inflation that would last for more than a few months.

But then he went on to argue that the Fed’s expansionary monetary policy was not to blame. That policy includes near-zero short-term nominal interest rates, an enlargement of the Fed’s balance sheet to nearly $9 trillion, and asset purchases at a monthly rate of $120 billion. Only recently did the Fed commit to lowering its rate of purchases to $60 billion – meaning that the Fed’s balance sheet is still expanding! If there was ever an aggressive monetary policy, this is certainly it.

Powell continues to insist that today’s high inflation is all about temporary bottlenecks and supply-chain problems stemming from the pandemic-induced recession and the subsequent uneven recovery. According to this view, the Fed is merely a passive agent, trying its best to provide enough liquidity so that the supply-side inflation does not disrupt financial markets and the overall economy.

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