monetary policy

The Fed remains resolute in its policy of raising interest rates. In its statements, it shows particular concern about an imbalance in its labour market following the social protection policies during the pandemic in the USA.

On June 15, the Fed raised its target interest rate by 75 basis points, the most substantial increase since 1994. The rate has already reached 1.75%, the pre-pandemic level. It does not seem to be enough; the expectation is that it will get 3.5% by the end of the year. Meanwhile, political and media discourses are looking for who to blame for the highest inflation rate in the last 40 years. A recession comes next. 

“If your only tool is a hammer, every problem looks like a nail”. Still haunted by the clever preaching of monetarist guru Milton Friedman’s ghost, all too many monetary authorities address every inflationary threat or sign they see by raising interest rates.

Friedman’s dictum that “inflation is always and everywhere a monetary phenomenon” still defines the orthodoxy. Despite changed circumstances in the world today, for Friedmanites, inflation must be curbed by monetary tightening, especially interest rate hikes.

Recent statements by Christine Lagarde, President of the European Central Bank (ECB), say that post-confinement inflation remains outside their influence. Its sources are the recovery of demand and border upheavals, she says. The ECB, like the Fed, combats the economic effects of the pandemic with large injections of liquidity into the markets and improvements in financial conditions. However, the latest monetary policy statement left aside price stabilisation, its only mandate. Does this mean that the ECB will sit back and watch inflation decimate purchasing power?