Inflation, the old villain of the American economy, is back, crushing the budgets of American families, devastating small businesses, and taking financial markets for a wild ride. That’s why the Fed has been hiking rates to cool off the economy and bring inflation under control.
But that isn’t enough, as inflation is more of a supply than demand problem, which the Fed has no control over. So the Biden administration has to take measures to help expand oil supplies and bring energy costs down, one of the key drivers behind the recent inflation surge.
How? To get some answers, International Business Times interviewed Diana Furchtgott-Roth, an adjunct economics professor at George Washington University and a Deputy Assistant Secretary for Research and Technology at the U.S. Department of Transportation from 2018 to 2021.
International Business Times: How serious is the current inflation episode compared to previous episodes?
Diana Furchtgott-Roth: This is the most serious inflation that we have seen in the past 40 years. It is made worse by the Fed’s inability to predict that it was coming.
IBT: How badly is the Fed behind the curve?
Furchtgott-Roth: The Fed is way behind the curve, and is making matters worse by not sticking to its forward guidance. The Fed stated that it was going to raise rates by half a percentage point, and then raised them by three-quarters of a percentage point. This means that instead of a slow and steady increase, markets see unexpected increases. Markets hate uncertainty.
IBT: How far [does] the Fed have to hike interest rates to bring it back to the “average” target of 2%?
Furchtgott-Roth: It depends if the Fed gets help from President Biden to lower energy costs. The Fed has to hike interest rates more without President Biden’s help. Here’s why. Energy prices are a major driver of inflation, and the President is sending energy prices higher by waging a war against the fossil fuel industry. This is discouraging companies from making investments in energy production which would lower energy costs. On June 17, he hosted his third Major Economies Forum on Energy and Climate, where he emphasized the need to decarbonize the economy and put more electric cars on the road. At the same time, his advisers are supposedly seeking answers to lowering gasoline prices, according to the Washington Post.
IBT: What can the Biden Administration do to help the Fed fight inflation without pushing the economy into recession?
Furchtgott-Roth: America is the largest oil and gas producer in the world, and President Biden could help fight inflation by increasing production. President Biden could lower the price of a barrel of oil by $10 to $20 with new energy policies because prices are set on the basis of expectations of future production.
On President Biden’s first day in office, he reduced oil and gas production by banning offshore drilling, expanding the boundaries of national monuments, and placing a moratorium on leasing activities in the Arctic National Wildlife Refuge. The President revoked the permit for the Keystone XL pipeline, which would have brought Canadian oil to U.S. refineries for processing into gasoline and heating oil.
In recent months, the Environmental Protection Agency, the Federal Energy Regulatory Commission, the Department of the Interior, the Council on Environmental Quality, and the Securities and Exchange Commission have all issued reports or proposed regulations that make it more difficult to develop energy and associated infrastructure. Banks and corporations are discouraged from investing in fossil fuel energy. FERC and the EPA are slowing down pipeline approvals. This makes it harder for companies to produce more in response to higher prices.
If President Biden wants to tackle inflation, he should start by admitting that times have changed since he took office, and he should start using America’s energy resources.