It has now become clear that higher levels of inflation are going to be with us for a while. The reasons for persistent inflation include: the very aggressive monetary policy adopted by the Federal Reserve Board (Fed) to deal with the 2020, Covid related, recession; the various cash transfer payments from the federal government to offset the impact of Covid on personal income; liberalized benefits e.g. enhanced unemployment compensation; supply chain problems caused by Covid and the rapid rebound in consumer demand globally; and, higher oil and gas prices caused by the sudden increase in demand.
Some of these factors are hard to fix, but what should be abundantly clear is that we do not need to add to the problem with new unfunded social welfare programs like those in the Biden Administration’s Build Back Better proposals. If these programs are adopted, they need to be fully funded. It is also clear that that funding cannot be assumed to come from the stimulative effect of the spending, since we are already at or near full employment.
It would probably be wise for the Fed to begin tapering its bond purchases and even raising interest rates. Chairman Powell has been reluctant to take these steps because he believed that these inflationary pressures would be more transient. Perhaps he will change his mind soon.
Unfortunately, Powell is under pressure from the progressive wing of the Democratic Party, specifically Senator Elizabeth Warren. She wants him replaced because she does not think he was hard enough on the banks during his tenure. I would view replacing Powell as a mistake, since Senator Warren would probably push for a candidate even less likely to raise interest rates than Chairman Powell.
