The Fed’s Model For Fighting Inflation Is Invalid

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One of the great mysteries of our trou­bled times is how the Federal Reserve generally escapes the kind of searing exami­nation such a powerful institution ought to undergo.

The Fed’s economic model is profoundly flawed. It assumes that the way to fight in­flation is to slow down or even depress eco­nomic activity.

The real cause of monetary inflation is weakening the value of the dollar, usually by creating too many of them. Yet the Fed never talks about defending the integrity of the dollar.

The Fed can’t be held responsible for nonmonetary inflation—higher prices re­sulting from regulation, higher taxes and, as happened during Covid, wild disruptions of supply chains. Yet the Fed’s assumption re­garding this is never seriously challenged.

Another related Federal Reserve mistake is its belief that manipulating interest rates is the best way to guide economic activity. It forgets that interest rates rose sharply in the 1970s—and so did inflation.

The best cure for inflation is a return to the gold standard—which may come sooner than most people think.

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