Those advocating for a rate hike see the current inflation as a problem of too much demand. They argue that the fiscal stimulus was too big, increasing incomes and demand too much. But what we are dealing with is not demand-driven inflation in an overheating economy. The COVID crisis started as a supply-side crisis that severely disrupted production, causing massive layoffs and furloughs. Income and demand crashed. Relief checks partially restored income but the supply side is still shaky—with continuing supply chain disruptions, bottlenecks, and price-gouging. The war in Ukraine will intensify and prolong such problems.

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Furthermore, the Fed has never managed to guide the economy to a soft landing with rate hikes. Many point to Fed Chairman Paul Volcker’s interest rate hikes in the 1970s — to 20 percent and beyond (and above 15 percent for a couple of years), but conveniently leave out what followed. The economy crashed into a deep recession, and a series of financial crises (the thrift crisis of the early 1980s, the developing nation debt crisis later in the 1980s, and the big bank crisis at the end of the 1980s) can all be traced to Volcker’s experiment. Chairman Alan Greenspan’s tightening in the early 1990s brought on a recession followed by our first jobless recovery, and his tightening in 2004 helped to bring on the global financial crisis in 2008 and another, even longer, jobless recovery.

The evidence shows that in high inflation periods—including the current one—the major contributors are rising rent as well as oil and food prices. None of these is particularly interest-sensitive. People do not usually borrow to buy fuel for their cars, purchase groceries, or pay rent. Indeed, raising rates can even be perverse: higher interest rates reduce home purchases as well as new home construction, meaning that those who might have bought houses have to compete for a limited supply of rentals—pushing up rents and fueling measured inflation.

We must find a better way to think about, and deal with, inflation. There is no one-size-fits-all approach to inflation control, but what is clear is that interest rates are a very imprecise tool for influencing prices. In the current circumstance, the more appropriate solution would be to work to alleviate supply-side constraints. That, however, requires much more work and intentionality than a stroke of a pen to change interest rates, which camouflages as action rather than the cop-out it has proven to be.

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