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. Thus after American inflation was pushing a stonking 15 per cent in 1980, Volcker ratcheted interest rates to 22 per cent. Grim, if you needed a mortgage. Still, that’s what genuine determination to shove the beast back in its cage looks like. Think episode seven of this season’s Stranger Things – flaming torches, axes, pikes and spears against (who’d have known the Duffer Brothers were amateur economists?) a truly ugly-ass monster.

In May, US annual inflation hit 8.6 per cent. According to the Volcker model, the Fed should be aiming for a target rate of at least 12 per cent. So what does our brave current Fed have planned? Interest rates may positively hurtle to 3.4 per cent by the end of this year and reach a giddy, vertiginous zenith of 3.75 per cent next year before cruising down to 2.5 per cent – job done, inflation safely in its cage at barely over 2 per cent, God back in his heaven and all well with the world.