Sadmonetarianism is living its moment.

And one of the biggest risks the US economy faces now is that it will too much influence on politics.

This term, among other things, was coined by William Keegan to describe the economic policies of Margaret Thatcher.

But a sado-monetarist has become a person who always seems to demand higher interest rates and fiscal austerity, regardless of the state of the economy.

And those people just had a good year:

the inflation which they have always warned about has finally materialized.

In 2021, US politicians, like many economists including myself, grossly underestimated the risks of inflation, as they themselves admit.

This candor, by the way, is in itself refreshing and welcome.

In the 2010s, very few of those who had wrongly predicted runaway inflation admitted they were wrong.

More importantly, policymakers are taking action to undo their own mistakes.

Budget deficits are collapsing.

The Federal Reserve has begun to raise the interest rates it controls, and long-term rates important to the real economy, especially mortgage rates and corporate borrowing costs, have soared.

These policies virtually guarantee a deceleration in the US economy, which may be acute enough to be considered a mild recession.

But there is a strong chorus of voices insisting that the Fed needs to tighten further; in fact, it should lead the US economy over an extended period of high unemploymentA bit like the great depression of the early 1980s.

And there is a real danger that the Fed will be forced to overreact.

So let’s talk about why the Fed’s calls for even more aggressive action are wrong.

First, how did inflation get so high?

Much of the story involves shocks such as rising oil and food prices, disrupted supply chains, etc., which are beyond the control of policy makers, i.e. policy makers other than themselves. Vladimir Putinwhose invasion of Ukraine has severely damaged the world economy.

These unrelated shocks with policies they explain why inflation has skyrocketed almost everywhere; for example, UK inflation just hit 9.1%.

Unfortunately, that’s not the whole story.

In the United States, at least, inflation is not limited to a few troubled sectors; even measures that rule out extreme price swings show inflation well above the Fed’s 2% target, albeit well below the numbers you might see in the headlines.

And the magnitude of the inflation suggests that the combination of last year’s heavy federal spending and easy money caused the economy to overheat, which we suffered from the classic case of too much money chasing too few assets.

However, as I said, policy makers have already taken strong steps to cool the economy again. So why isn’t it enough?

The answer I keep hearing is that tough policy is needed to restore the Fed’s credibility.

And to be fair, there are good reasons to believe that credibility is an important factor in keeping inflation in check.

What we don’t have are good reasons to believe that credibility has been lost.

Economists have long accepted the idea that persistent inflation can feed itself.

In 1980, for example, nearly everyone expected high inflation to continue indefinitely, and these expectations were reflected, among other things, in large wage agreements that gave inflation a lot of inertia.

So Paul Volcker, the Fed chairman at the time, had to impose a severe and protracted recession to break the inflationary cycle.

But aside from the sadomasochists themselves, who currently expects inflation to remain consistently high (as opposed to staying high, say, for the next year)?

Not the financial markets.

On Wednesday, the five-year break-even inflation rate, a measure derived from the spread between US government bonds that are and are not inflation-protected, was just 2.74%.

And part of that reflects expectations of short-term price increases that investors don’t expect will continue; markets expect inflation to go down.

And the general public?

Last month, economists at the Federal Reserve Bank of New York, which conducts regular polls of consumer expectations, noted that consumers had expected inflation “to decline over the next few years” and that five-year expectations had been ” remarkably stable “.

A few weeks ago, another survey by the University of Michigan showed an increase in long-term inflation expectations, which had previously been flat.

But data from the New York Federal Reserve did not show the same increase.

And as anyone who works with economic data can tell you, you shouldn’t put too many stocks into a month’s issue, especially if other numbers don’t tell the same story.

To be clear, I am not saying that any of these predictions are necessarily correct.

What they tell us instead is that expectations of persistent inflation are not as ingrained as they were in 1980.

So it doesn’t seem like we need Volcker-style repression, policies that punish the economy until morale improves.

Inflation is a real problem and the Fed needs to tighten it up.

But it will be tragic if the Fed listens to people who are indeed calling for a much deeper recession than the economy seems to need.

c.2022 The New York Times Company