Raising Interest Rates Won’t Control Inflation, Analyst Says

The Federal Reserve has it all wrong, according to MBMG Group Managing Partner Paul Gambles.

If inflation is due to supply chain disruption, managing demand—and inflation—by hiking interest rates is not the solution, the advisory firm’s executive told CNBC. “Supply is very difficult to manage, we are finding across a whole bunch of industries, a whole bunch of businesses, they’re having very different challenges just turning the taps back on.”

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Goods have been getting derailed on their way to consumers as global manufacturers and suppliers have been unable to keep export paths working efficiently during COVID-19 lockdowns. Sanctions on Russia for its invasion of Ukraine have also halted the supply of some commodities.

“The Fed are the first ones to put up their hands and say monetary policy can’t do anything about supply shock. And then they go and raise interest rates,” said Gambles.

To tamp down inflation, governments worldwide have been trying to dampen demand by raising rates. In June, the Fed increased its benchmark interest rate by 75 basis points, the largest hike since 1994. Australia, the Philippines, Singapore, and Malaysia have all raised their rates, too.

Gambles claims that inflation is not a monetary policy issue, given its supply chain source. “If we look at where employment would have been in the States, if we hadn’t had COVID, and we hadn’t had the lockdowns, we’re still about 10 million jobs short of where we would be. So, there’s actually quite a lot of potential slack in the labor market. Somehow that’s not translating to the actual slack.”

Instead, the U.S. should provide a fiscal boost to fix inflation, Gambles said. “The federal budget for the financial year 2022 is $3 trillion on a gross basis lighter than it was in 2021. [We’ve] got a huge shortfall going into the U.S. economy. And, you know, there’s probably very little that monetary policy can do about that.”

Many economists are now concerned that the use of interest rate hikes as a tool to solve the inflation problem could trigger a recession. In addition, an increase in interest rates make it more expensive for firms to expand. That, in turn, could lead to cuts in investments, which would ultimately hurt employment and jobs.