Washington’s continued spending spree has put the Federal Reserve in a difficult position, potentially curbing its ability to tackle inflation with tools such as rate hikes.
“The Fed’s policy of targeting interest rates is being manipulated by the government’s spending and that is fueling inflation,” EJ Antoni, a research fellow for Regional Economics at the Heritage Foundation, told Fox News Digital.
Antoni’s comments come after a paper released last week by Francesco Bianchi of Johns Hopkins University and Leonardo Melosi of the Chicago Fed placed the blame on government spending for the current sky-high rate of inflation, arguing that Fed tools such as interest rate hikes could even make the problem worse.
“The recent fiscal interventions in response to the Covid pandemic have altered the private sector’s beliefs about the fiscal framework, accelerating the recovery but also determining an increase in fiscal inflation,” the paper said. “This increase in inflation could not have been averted by simply tightening monetary policy.”
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Federal spending has soared in recent years after Congress passed multiple rounds of stimulus under both the Trump and Biden administrations.
The spending continued with the passage of President Biden’s $1 trillion infrastructure bill last year and this year’s Inflation Reduction Act, which totaled about $740 billion.
Despite the bill’s name, experts warned that this federal government spending will do little to curb inflation.
“Naming it ‘anti-inflation’ is a joke,” O’Shares ETFs Chairman Kevin O’Leary said of the legislation during an appearance on CNBC last month. “This is going to be very inflationary almost immediately because we’re printing billions of dollars.”
Antoni shared this concern. He told Fox News Digital that despite the risk that interest payments on the national debt could become “the largest item in the entire budget,” the Fed should tackle inflation by halting the printing of more money.
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“The Fed should not even be thinking about setting interest rates, other than the discount rate, but should focus on inflation,” Antoni said. “As soon as inflation rises, the Fed should slam the brakes on money creation, no matter how expensive the interest payments on the national debt become.”
The Bianchi-Melosi report said there is little the Fed can do to bring down inflation if spending levels remain high, arguing that inflation can be reduced “only when public debt can be successfully stabilized by credible future fiscal plans.”
“”The risk of persistent high inflation the U.S. economy is experiencing today seems to be explained more by the worrying combination of the large public debt and the weakening credibility of the fiscal framework,” the paper said.
Nevertheless, Federal Reserve Chair Jerome Powell has expressed optimism that the central bank can tackle the problem.
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Speaking at a Jackson Hole, Wyoming, summit last week, Powell said the Fed has an “unconditional” responsibility to bring down inflation.
“We are taking forceful and rapid steps to moderate demand so that it comes into better alignment with supply, and to keep inflation expectations anchored,” Powell said. “We will keep at it until we are confident the job is done.”
But Antoni expressed less confidence in the Fed’s leadership, saying it has become clear the central bank’s priorities have shifted and that it will “continue enabling the federal deficit spending.”
“When the Fed is so busy with woke talking points like diversity and climate change, it clearly has lost its independence,” Antoni said.
