Stipulate, arguendo, that we actually have one of those going on. Federal Reserve Chairman Jerome Powell wants to cool it down hard.
The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.
That is the Fed’s standard answer for dealing with inflation, manipulating interest rates are its primary tool, and it’s not an entirely wrong answer. Burgeoning economic activity that has demand for goods and services overwhelming the ability of producers to deliver the goods and services is a major driver of inflation, and that inflation hammers us average Americans by badly devaluing our incomes. Dampening demand is a way to deal with inflation.
Consumer demand isn’t the only component of overall economic demand: Federal spending is another major player, and the Federal government creates completely artificial demand with its spending.
Repeat my opening stipulation. If our economy is strong, we don’t need nearly so much Federal spending. The Biden administration—and any following series of administrations—need to cut out the stimulus spending, cut back on “baseline” spending, and get out of the way of the private economy. Absent Federal…interference…in our economy, spending and supply will align quickly as us Americans decide for ourselves what we will buy, what we will produce, and the price levels at which we will carry out the relevant exchanges.
Take note, also: that puts a premium on the Republican House and Senate caucuses standing firm on requiring spending cuts beginning next fiscal year and continuing into the out years as a quid pro quo for raising the debt ceiling this year.