Fed's Rate Hike Focused on Wrong Enemy: Oil Prices vs Monetary Inflation

The Federal Reserve's recent rate hike has been met with criticism from some economists who argue that it is targeting the wrong problem. According to Kevin Warsh and his team, the Fed is 'shadowboxing' inflation by focusing on rising oil prices rather than monetary inflation.

Milton Friedman defined inflation as a monetary phenomenon, caused by an increase in money supply outpacing output growth. Currently, the M2 metric shows inflation running around 5 percent. However, Warsh and Co. are fixated on oil prices, which is not the same thing as inflation.

Economist Daniel Lacalle pointed out that policymakers often confuse individual price movements with aggregate price levels. He explained that an oil shock would actually be disinflationary, as high oil prices reduce the amount of money available to purchase other goods and services, leading to stable or falling prices elsewhere.

Lacalle further argued that the rate hike will have 'zero impact' on energy prices or government spending, but will instead hurt small businesses and families by increasing their financing costs. He also warned that keeping rates higher for longer could tip the economy into recession.