"Half of US Inflation Rise Due to Expansionary Fiscal Policy... Fed Cannot Solve It Alone"

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] An analysis has emerged that the recent surge in inflation in the United States largely stems from expansionary fiscal policies, making it difficult for the central bank, the Federal Reserve (Fed), to resolve the issue alone.

On the 27th (local time), according to Bloomberg News, Professor Francesco Bianchi of Johns Hopkins University and Senior Economist Leonardo Melosi of the Federal Reserve Bank of Chicago presented a report with this content at the annual economic policy symposium hosted by the Kansas City Fed in Jackson Hole, Wyoming.

They stated, "The fact that roughly half of the recent increase in inflation is due to fiscal causes poses a special challenge to today's policymakers," adding, "Fiscal inflation is not only very persistent but also requires a different policy response than before."

While some in the market have criticized the Fed for starting to raise interest rates only in March as 'too late,' Professor Bianchi and Economist Melosi assessed that even if monetary tightening had begun earlier, there would have been little difference from the perspective of inflation.

They argued, "If inflation has fiscal characteristics, monetary policy alone may not be able to respond effectively," and "Early rate hikes would have resulted in only limited inflation reduction at the cost of significant economic output contraction." They added, "When inflation has fiscal characteristics, the central bank is not solely responsible for reducing inflation."

At the meeting, some also warned of the risks of quantitative easing (QE), suggesting that the Fed's quantitative tightening (QT) may not proceed smoothly. Professors Viral Acharya of New York University and Raghuram Rajan of the University of Chicago said, "The reduction of the central bank's balance sheet is unlikely to be a completely smooth process," and "There is a need to carefully reconsider the benefits of quantitative easing."

This content was produced with the assistance of AI translation services.