Cato Study Concludes Fed Cannot Control Inflation

[pmbug]

Research by Cato’s Center for Monetary and Financial Alternatives (CMFA) shows that there is not much empirical support for the notion that the Fed can precisely control inflation.

Earlier this year, Cato published a paper that suggested monetary policy was the least important contributor to inflation, far behind both demand and supply factors in the economy. However, that paper used a simple approach (known as a VAR methodology) to study the sources of inflation. Cato CMFA’s newest research paper addresses this weakness and provides more robust evidence that the Fed cannot precisely control inflation.

Unlike the previous approach, the new working paper uses a sophisticated macroeconomic model, one that includes a variety of features to capture facets of the US economy accurately. The results are very similar to the first study—supply factors dominate the overall changes in inflation ...
...
Conclusions from this analysis ... people should stop looking solely to the Fed to actively manage the economy. At best, such active management will be ineffective, at worst it will be ineffective and crash labor or credit markets.

The CMFA’s prior article claimed, “Anti‐inflationary policies necessitate a holistic approach and cannot merely rely on timely changes to the Fed’s policy rate.” The new analysis presented here confirms this recommendation with even more robust evidence.

https://www.cato.org/blog/new-cato-cmfa-study-confirms-fed-ineffective-controlling-inflation

I haven't dug in to the details of their study yet so I don't have any thoughts as to the validity of what's been posted here. Seems a bit off though. Fed's rate policy has a huge effect on credit markets and thus the economy.

 

[Casey Jones]

A great effect on the efficacy of the economy - whether it grows, allowing for free trading, input of productivity and resultant reward...but not on inflation.

Inflation, at base, is a debasing of the currency by increasing the currency without increasing underlying wealth, i.e. productivity.

It's a problem that Leftists neither grasp nor want to understand: Government can only impede. It cannot expedite. The best economy is one where there is NO government input - only a government guarantee of soundness of the money used, and a dedicated enforcement of basic law.

 

[nickndfl]

They cannot fight inflation without crashing the economy because spending is skewing everything.

 

[chieftain]

They can fix inflation within a week...

By committing suicide.

 

[nickndfl]

They may keep rates higher for longer instead of spiking them further? That will allow everybody to adjust to the new normal and force force institutions to compete for savings instead of sucking off the FED's teet.

 

[Casey Jones]

They may keep rates higher for longer instead of spiking them further? That will allow everybody to adjust to the new normal and force force institutions to compete for savings instead of sucking off the FED's teet.

Saving, with a 20-percent inflation rate, is a fool's game.

And there is no WAY a bank is gonna offer a rate to depositors to beat the 20-percent true CPI increase rate.

 

[Joe King]

https://www.cato.org/blog/new-cato-cmfa-study-confirms-fed-ineffective-controlling-inflation

I haven't dug in to the details of their study yet so I don't have any thoughts as to the validity of what's been posted here. Seems a bit off though. Fed's rate policy has a huge effect on credit markets and thus the economy.

https://www.cato.org/sites/cato.org/files/2023-10/cmfa-working-paper-78.pdf