Frederic Mishkin is right that the Federal Reserve must not emulate Paul Volcker’s mistake of easing monetary policy before inflation is defeated (Opinion, September 15). President Joe Biden must also avoid Ronald Reagan’s mistake of stimulating fiscal policy while the Fed fights inflation. In the 1980s, US deficits reached 5 percent of gross domestic product. To offset this stimulus, the Fed was forced to raise interest rates to their highest level since the birth of Christ, as Helmut Schmidt noted.
The combination multiplied the national debt. Tightening monetary policy and expansionary fiscal policy helped push US current account deficits closer to 3 percent of GDP. As the Fed seeks to reduce aggregate demand, US Treasury rates have risen hundreds of basis points since early 2022, and the US current account hit 4.8 percent of GDP in the first quarter of 2022, fiscal discipline is again essential.
William Thorbecke
Senior Fellow, Research Institute for Economics, Trade and Industry
Tokyo, Japan
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