The recent midterm elections have highlighted the growing affordability crisis facing Americans, with many calling for immediate relief. The focus has turned to the Federal Reserve and its chair, Kevin Warsh, to address inflation through interest rate adjustments. However, experts argue that the Fed's tools are not the right solution for the current affordability issues, which are largely driven by supply constraints rather than inflation.
The latest inflation reading shows a 3.6% increase in price levels. Apollo Global Management Inc. Chief Economist Torsten Slok estimates that the Fed would need to raise its policy rate by another 2.75 percentage points to reach its 2% inflation target, a move that many consider too aggressive. The economy is running a bit hot, but not overheating to the extent that such drastic measures are justified.
High prices today are largely due to supply constraints in housing, healthcare, energy, and a shortage of migrant workers, factors beyond the Fed's control. Structural forces, such as an aging population and reduced trade, also contribute to higher inflation rates. Aggressive rate hikes risk triggering a serious recession, which could be worse for households than the current inflation rate.
To truly address affordability, Congress needs to focus on expanding the supply of goods and services. This involves deregulation, incentivizing private sector investments in housing, increasing energy production, and reforming healthcare. While these measures are challenging and require political will, they offer a more sustainable solution than relying on the Fed's interest rate policies.