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The Fed Does Not Deserve All the Inflation Blame

The US Federal Reserve certainly bears its share of responsibility for the great inflation of the 2020s. But powerful political pressures from the left and overly-optimistic analyses of open-ended debt policy, not to mention genuine uncertainties about inflation and real interest rates, also played a very large role.

CAMBRIDGE – A growing crescendo of commentary places the blame for the current surge in US inflation squarely on the Federal Reserve. But much of the criticism is stupefyingly naive about the political pressures that the Fed and other central banks around the world have had to navigate in recent years.

In the United States, pressures on the Fed reached a peak when the Democrats, eager to put progressive ideas into practice, took control of the White House and Congress in January 2021. Yes, the Fed has significant independence in many dimensions, but it does not enjoy nearly the same institutional independence as, say, the European Central Bank.

Instead, the Fed is a creature of Congress that can, in theory, be radically transformed at short notice. Importantly, the term of the Fed’s chair always expires one year into a new president’s term, and President Joe Biden’s administration was able to make several other Fed appointments as well. Although the idea of “Fed packing” (adding new positions to tilt the central bank’s voting majority) never gained traction, Fed officials surely noticed the Biden administration’s discussion of whether to counter the US Supreme Court’s conservative majority by increasing the number of justices.