Beware the dangers of sado-monetarism

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NEW YORK (NYTIMES) - Sado-monetarism is having a moment. And one of the biggest risks now facing the US economy is that it will have too much influence over policy.

This term, by the way, was coined by William Keegan to describe Margaret Thatcher's economic policies. But sado-monetarist has come to mean a person who always seems to demand higher interest rates and fiscal austerity, regardless of the state of the economy.

And such people have just had a good year: the inflation they've always warned about finally materialized. In 2021, US policymakers, like many economists, myself included, badly underestimated inflation risks - as they themselves admit..

More important, policymakers are acting to undo their mistakes. Budget deficits are plunging. The Federal Reserve has begun raising the interest rates it controls, and the longer-term rates that matter for the real economy - especially mortgage rates and corporate borrowing costs - have soared. These policies pretty much ensure a slowdown in the US economy, which might be sharp enough to be considered a mild recession.

But there's a loud chorus of voices insisting that the Fed must tighten even more - indeed, that it must drive the US economy into a sustained period of high unemployment something like the big slump of the early 1980s. And there's a real danger that the Fed may be bullied into overreacting.

So let's talk about why the demands for even more aggressive Fed action are misguided.

First, how did inflation get so high? A large part of the story involves shocks like rising oil and food prices, disrupted supply chains and so on that are outside the control of policymakers - that is, policymakers other than Vladimir Putin, whose invasion of Ukraine has seriously damaged the world economy. These nonpolicy shocks explain why inflation has soared almost everywhere - ...

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