The Nation's Fight Against Inflation

Jayden D'Onofrio - Teen Aspect - June 8th, 2022
The Federal Reserve (Stefani Reynolds for The New York Times)
 

President Biden currently wields a 52% disapproval rating and is drawing parallels to former President Carter’s tenure, a similarity almost no president wants to be associated with[i]. As of June 8th, 2022, the national average gas price per gallon is $4.91, an unprecedented price that is the brute outcome of considerable unfortunate circumstances plaguing Biden’s presidency[ii]. As conservatives continue to blame Biden for the rising inflation and consumer costs, the fact is the ongoing war in Ukraine as well as supply problems stemming from COVID-19 has propelled the United States, like the rest of the world, into a worrisome inflationary climb.


What is to be done?


Well, several things, but one in particular which falls to the Federal Reserve, the nation’s central banking system that controls the monetary structure and ensures the country steers away from a financial crisis. Formed in 1913, the Federal Reserve took on the chief role of supervising the nation’s economic development after decades of financial catastrophes, specifically the great depression. Usually simply called the Fed, it is widely regarded as the most influential financial institution in the world.


Bearing that in mind, what can the Fed do to combat rising inflationary rates, intense consumer costs, and the president’s dismal approval ratings?


Quantitative tightening, a process already said to be jumpstarted by the highest leaders of the Fed.


To know what quantitative tightening is, we must understand what quantitative easing is, the process of the Federal Reserve buying bonds through production of dollars for such purchases. In essence, the Fed is basically supplying more dollars to national bank reserves which they hope will in turn cause lenders to be more frugal with credit lending towards various companies and households across the nation. Increased credit, or money in the hands of those borrowing, often incentivizes economic growth. However, it also leads to the Federal Reserve accumulating a massive balance sheet, or the value of total assets held by the Fed. Today, the Fed holds almost a $9 trillion balance sheet which in effect stimulates the economy. The Federal Reserve took in nearly half of those assets during the COVID-19 pandemic to stave the nation off the brink of total economic collapse.


Economic stimulation has obviously almost always been a positive, so what has changed?


With inflation running rampant in the United States, constant economic stimulation by the government will only further perpetuate the causes of inflation. As such, the idea of quantitative tightening has come about. Quantitative tightening focuses on the Fed reducing its balance sheet by selling its assets and draining their own reserves. The consequence is the complete undoing of quantitative easing but less pressure in promoting inflation to a continued climb. Money reserves would fade from banks across the nation allowing for less credit to be granted to companies and homeowners alike. A spike in interest rates results, also further depleting the inflationary climb. Essentially, the Fed would be reducing the money that would be in circulation for banks to lend causing many to try and find profits in higher interest rates.


The cause of concern stems from how aggressive such a policy will be.


If the Fed is too light on the process of quantitative tightening, inflation will continue to spiral out of control and paralyze Americans. But if the Fed is too aggressive, they may directly cause a recession in the United States. While recessions are not a good thing, they may sometimes provide a valuable restart to an economy as they highlight the underlying issues of the national economic structure and cause them to be more readily remediable. Consequentially, the Fed may decide to be as aggressive as possible in its fight against inflation without regard to the effects it may have on the national economy in terms of a possible recession.


The Fed has consistently wrangled with not having enough inflation each year for the past few decades. Now, the Fed is confronting an unprecedented crisis of the total opposite kind they most recently fought. The continuation of the United States unparalleled economic prowess relies on the Federal Reserve in the coming years to carry out quantitative tightening in an aggressive, yet responsible methodology. If no perfect median is found, Americans may face a rough short-term future amongst the horrific consumer costs consistently climbing.


References

[i] Thomson Reuters. (2022). What does the country think of Biden? Reuters. Retrieved June 7, 2022, from https://graphics.reuters.com/USA-BIDEN/POLL/nmopagnqapa/

[ii] National Average Gas Prices. AAA Gas Prices. (2022). Retrieved June 7, 2022, from https://gasprices.aaa.com/



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