Opinion: Rising inflation rate spurs monetary policy debate

Inflation is a scary hot topic these days.

I recently moderated a CEO Roundtable discussion with bankers, and they brought it up as a key area of concern – one that could tip economic scales.

National headlines tell the story: “U.S. Inflation is Highest in 13 Years as Prices Surge 5%,” from a June article in The Wall Street Journal.

Then I received an op-ed from economists arguing high inflation is here for the foreseeable future. Here’s why, according to the authors: the increased supply of money.

Doesn’t seem so bad on the surface, does it? But coupled with a shortage of goods during the early-stage reopening of the economy, those are ingredients to cause inflation to rise at historic levels.

Let’s join the conversation.

First, what is inflation?

There are a few layers to the answer, but generally it’s the rate of price increases for goods and services across an economy.

Nobody wants to pay more for the same grocery basket they filled six months ago. But that’s where purchasing power comes into play. Inflation rises when purchasing power declines.

“There is an old saying that inflation occurs when too much money is chasing too few goods,” explains the op-ed sent by the Missouri Press Service on behalf of The Hammond Institute for Free Enterprise at Lindenwood University. “If the supply of money – cash, checking, savings and similar accounts – increases faster than the public’s willingness to hold it, they spend it and a faster increase in prices results.”

So, the value of the dollar falls. Boo.

Before we converse further, let me introduce you to op-ed authors Gerald Dwyer and Rik Hafer. They’re not armchair economists. Dwyer is a professor of economics at Clemson University, and Hafer is a professor of economics and director of the Center for Economics and the Environment at The Hammond Institute. Both are former Federal Reserve economists.

Dwyer and Hafer say there’s one way the rate of inflation can be slowed, and it has to do with quantitative easing.

Come again?

Yes, quantitative easing. You remember, that monetary policy you mastered in college?

Basically, it’s when a central bank, like the Fed, introduces new money into the money supply. There are many reasons for this revolving around fiscal policy, but in the current U.S. situation, it was an economic preservation plan in the face of a pandemic.

Last year, the Federal Reserve committed over $700 billion in a quantitative easing plan announced March 15, 2020, and three months later said it’d buy at least $80 billion a month in Treasuries and $40 billion in mortgage-backed securities until further notice.

The op-ed authors say the time for that notice is now.

“The Fed is in a pickle,” they wrote. “The only way policymakers can regain control over inflation is to end its quantitative easing program.”

But it doesn’t sound like they’re hedging their bets on the Fed taking that action – not this year, anyway.

“Because this would push market interest rates higher, don’t expect them to act any time soon, however,” they wrote. “Not only might higher rates slow the decline in the unemployment rate, but it also would increase the government’s interest cost on its burgeoning debt.”

Local bankers are wary of the fate of the interest rate.

“I don’t think any of us want to see that take too many jumps in the wrong direction,” said Tim Scott, a regional president with The Bank of Missouri, during Springfield Business Journal’s CEO Roundtable in mid-June – just prior to Fed officials saying they’d hold interest rates at near zero until possibly 2023.

Eavesdropping more on that bankers’ conversation, we hear debate on how long the inflation rate will rise.

“They keep saying that it’s going to just be a transition period type of inflation, and I don’t know if I’m completely sold on that,” said Brett Magers, president of Legacy Bank and Trust. “I think the Fed will have to respond with rate increases. It’s not baked in yet. Investors haven’t bought into it, and there’s a lot of people saying the 10-year [Treasury] should be coming up by this point if there really is inflation pressure. But there’s a flight of money to the U.S. right now, too. A lot of foreign investors are buying the 10-year and keeping it depressed, I think.”

Chew on that.

Economics professors Dwyer and Hafer close with this warning: “If the Fed continues with its easy-money, low-nominal interest rate policy, prepare for inflation rates that are much higher than we’ve gotten accustomed to.”

Springfield Business Journal Editorial Vice President 
Eric Olson can be reached at eolson@sbj.net.