Cato Study Concludes Fed Cannot Control Inflation

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 ...
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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.

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nickndfl said:

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.

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pmbug said:

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.

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