galbraith31_Kent Nishimura  Los Angeles Times via Getty Images_fed Kent Nishimura/Los Angeles Times via Getty Images

Mainstream Economics’ Medieval Inflation Medicine

Considering that the US inflation rate peaked in June 2022, there is no evidence that monetary policy had any significant effect on the direction taken by prices. Yet, like premodern physicians committed to the ancient humoral theory of disease, mainstream economists today have shown that they lack the tools to cure the patient.

AUSTIN – When assessments of the quasi-inflation of 2021-22 appeared in major US media outlets this month, the prognosis was good: the fever has receded and may already be gone. The latest reports on personal consumption expenditures were jubilant. If trends continue, “such a success would be likely to shape [US Federal Reserve Chair Jerome Powell’s] legacy,” noted Jeanna Smialek of The New York Times.

Smialek’s article illustrates the fetish of Fed worship. The two economists she quotes, a former Fed official and a banker, are resolute in crediting Powell and his colleagues. “The Fed right now looks pretty dang good,” says one. “Certainly they’ve done very well,” says the other. Still, some readers may harbor doubts, because, as Smialek notes, we have “an outcome that [the Fed’s] own staff economists viewed as unlikely just six months ago.”

What should we make of this? Supposedly, the Fed’s actions “played a role in … keeping consumers from adjusting their expectations.” Yet none of the experts, including the professionals who guide policy, shared the inflation optimism now attributed to the consuming masses or even detected its presence. With all their surveys and all their models, they were surprised.