Raising interest rates to curb demand – and thus inflation – isn’t the right answer, as high prices have been mainly caused by supply chain shocks, one analyst said.
Global manufacturers and suppliers have been unable to efficiently manufacture and deliver goods to consumers during Covid lockdowns. And more recently, sanctions against Russia have also limited supplies, mainly of raw materials.
“The supply is very difficult to manage. We find across a whole range of industries, a whole range of companies, they have very different challenges just turning the tap back on,” Paul Gambles, managing partner at MBMG Group consulting firm, told CNBC’s. Street Signs” on Monday.
Referring to the energy crisis Europe is facing as Russia threatens to cut off gas supplies, he said that “on US Independence Day this is sort of a co-dependency day where Europe is absolutely shooting itself in the foot because so much of this has come about as a result of sanctions.”
“And the Fed is the first to raise their hands and say that monetary policy can’t do anything about the supply shocks. And then they’re going to raise interest rates.”
The US Federal Reserve raised its benchmark rate by 75 basis points in June to a range of 1.5%-1.75% — the largest increase since 1994. Fed Chair Jerome Powell (above) noted that another rate hike was expected in July. can come.
Mary F. Calvert | Reuters
However, governments around the world have focused on cooling demand as a means of curbing inflation. The elimination of interest rates is intended to bring more into balance demand with limited supply.
For example, the US Federal Reserve raised its benchmark rate by 75 basis points to a range of 1.5%-1.75% in June — the largest increase since 1994 — with Chairman Jerome Powell hinting that another rate hike could be expected in July.
The Reserve Bank of Australia is set to raise rates again on Tuesday, and other Asian and Pacific economies such as the Philippines, Singapore and Malaysia have all jumped on the same rate hike.
The Fed said in a statement it chose to raise rates as “general economic activity” appeared to have picked up in the first quarter of the year, with rising inflation reflecting “supply and demand imbalances in the economy.” related to the pandemic, higher energy prices and broader price pressures.”
Monetary Policy the ‘Wrong Solution’
Gambles said demand is still below the level it was before the pandemic started, but would have fallen short even without the Covid roadblocks.
“If we look at where employment in the United States would have been, if we hadn’t had Covid and we hadn’t had the lockdowns, we’re still about 10 million fewer jobs than where we would be. So there’s, there is actually quite a lot of potential slack in the job market. Somehow that doesn’t translate to the actual slack,” he said.
“And again, I don’t think that’s a matter of monetary policy. I don’t think monetary policy would make much of a difference in that.”
With supply shocks rearing their ugly heads from time to time, it would be difficult for central banks to maintain a sustainable grip on inflation, Gambles added.
Gambles argued that the United States should instead look to a fiscal stimulus to fix inflation.
“The U.S. federal budget for fiscal year 2022 is $3 trillion lower on a gross basis than it was in 2021. So we have, you know, we have a huge deficit in the U.S. economy. And, you know, there’s probably very little that is monetary policy. can do about it,” he said.
Gambles says adjusting monetary policy is “the wrong solution to the problem.”
Other “unconventional economists” – cited by Gambles in the interview – such as HSBC senior economic adviser Stephen King, have also put forward analyzes that argue that it is not just the supply or demand shock that is responsible for inflation, but the workings of both. parties of the comparison.
Pandemic lockdowns, supply chain upheavals and the war between Russia and Ukraine, as well as the stimulus that governments have pumped into their economies and easing monetary policy, have contributed to soaring inflation, economists like King have said.
“Economically, the COVID-19 crisis was viewed by many as a demand challenge primarily. Central banks responded by offering very low interest rates and continued quantitative easing, even as governments offered massive fiscal stimulus,” King said in a note earlier this year. . mainly referring to the pandemic.
“In reality, in advanced economies, COVID-19 had only limited lockdown-related, demand-side effects.”
“Supply side effects have proven to be both significant and much more persistent: markets now function less well, countries are economically decoupled and workers are less able to cross borders and, in some cases, less available within borders. Easing policy conditions when delivery performance is so strong have deteriorated, it will probably only lead to inflation.”
Since supply cannot fully respond to the increased money flowing through economies like the United States, prices must rise, he added.
Still a popular antidote
Nevertheless, rate hikes remain the popular antidote to inflation fixation.
But economists are now concerned that using rate hikes as a tool to solve the inflation problem could trigger a recession.
A rise in interest rates makes it more expensive for companies to expand. That, in turn, could lead to cutbacks in investment, ultimately hurting employment and jobs.