Federal Reserve interest rate increases designed to cool inflation actually drive up housing rents, potentially undermining the central bank's stated anti-inflation efforts
Great point about the European approach - that's exactly the kind of fundamental rethinking this research calls for!
I'd actually take this even further in two directions:
First, on the supply-side inflation problem: Even with better inflation measures, we'd still face the Larry Summers (and Ben Bernanke who did a recent study that admits that COVID inflation was supply, not wage, driven) pushing for aggressive rate hikes regardless of whether inflation is demand-driven or supply-driven. This study (and others) shows how poorly suited traditional monetary policy is for supply-constrained inflation, yet some of the same economic leaders seem down right giddy in using rate hikes and higher unemployment.
Second, on monetary architecture more broadly: Research raises fundamental questions about whether we even want uniform interest rates across all economic activities at the central bank level. Should productive investment (like construction or energy projects), government spending, and consumption really face the same borrowing costs? As state-owned development banks and targeted financing become more prevalent globally (China being the biggest example) the US looks increasingly outdated in using only broad-brush monetary policy.
While Trump's attempts to pressure the Fed are absolutely inappropriate and dangerous for institutional independence, this study does highlight how the Fed's blunt-instrument approach has imposed enormous costs, with many people feeling that the Fed lost sight of the "full employment" aspect
Brings up the question whether the inflation measure in the US should follow the European approach of completely excluding shelter from the measure.
Great point about the European approach - that's exactly the kind of fundamental rethinking this research calls for!
I'd actually take this even further in two directions:
First, on the supply-side inflation problem: Even with better inflation measures, we'd still face the Larry Summers (and Ben Bernanke who did a recent study that admits that COVID inflation was supply, not wage, driven) pushing for aggressive rate hikes regardless of whether inflation is demand-driven or supply-driven. This study (and others) shows how poorly suited traditional monetary policy is for supply-constrained inflation, yet some of the same economic leaders seem down right giddy in using rate hikes and higher unemployment.
Second, on monetary architecture more broadly: Research raises fundamental questions about whether we even want uniform interest rates across all economic activities at the central bank level. Should productive investment (like construction or energy projects), government spending, and consumption really face the same borrowing costs? As state-owned development banks and targeted financing become more prevalent globally (China being the biggest example) the US looks increasingly outdated in using only broad-brush monetary policy.
While Trump's attempts to pressure the Fed are absolutely inappropriate and dangerous for institutional independence, this study does highlight how the Fed's blunt-instrument approach has imposed enormous costs, with many people feeling that the Fed lost sight of the "full employment" aspect