The real plan for inflation? To let it rip

Check out these hyperventilating headlines from last week: ‘What the Fed’s largest interest rate hike in decades means for you’ (PBS.org). ‘Federal Reserve interest rate hike opens new era for economy’ (Washington Post). ‘The Fed delivers biggest rate hike in decades to fight inflation’ (National Public Radio). ‘Fed goes for inflation’s jugular with 75bps rate hike’ (Schwab).

While it’s true that the US Federal Reserve has not hiked its funds rate by 0.75 percentage points in one go since 1994, the figure prominently missing from those bug-eyed bulletins, and bizarrely unmentioned in all the television news coverage of this ostensibly bold move that I encountered, is what the Fed raised its interest rate to: a miserable 1.5 per cent.

In the classical economics that former Fed chairman Paul Volcker applied to subdue runaway inflation with such success in the 1980s, ‘going for inflation’s jugular’ entails hiking interest rates above the rate of inflation.