Why Didn’t Democrats Blame The Fed for High Inflation?

Such analysis is awful economics, which in turn encourages terrible policy, like price controls. Yet one can imagine an alternative lightning rod for politicians to deflect voters’ anger towards. After reading my piece, one reader asked:

It’s a good question. Both the monetarist and new Keynesian explanations for inflation ultimately put responsibility for the inflation with the Fed. The Fed allowed the money supply to grow rapidly, which fueled high inflation once the economy reopened from the early pandemic. And while under some macroeconomic schools of thought, excessive government borrowing can fuel demand and so inflation directly, the Fed is supposed to be taking this (and supply conditions) into consideration when making its monetary policy decisions. The White House would thus have found intellectual support from many economists had it blamed errors at the Fed for inflation.

Now, let’s suppose that the Biden administration accepts, in principle, these theories of inflation. Let’s also presume intellectual honesty on behalf of the politicians. I can still perceive of possible reasons why the White House may have been unwilling to cast blame at the Fed for the recent surge in prices:

1. They may just have believed (mistakenly) that the initial high inflation was all due to negative supply-shocks and that the Fed was correct to “look-through” these and accept higher inflation as the price worth paying for less output volatility.
2. They may have thought that criticizing the Fed directly would be seen as compromising its independence, or at least risk souring relations with it (look at how Liz Truss was covered for criticizing the Bank of England’s inflation performance).
3. They may have thought that blaming the Fed would create incentives for the central bank to be overly cautious about stimulus in future downturns. Remember, many in the Biden administration wanted to “run the economy hot” post-pandemic, perceiving that too little macroeconomic support was to blame for the slow recovery coming out of the financial crisis.

I put these theories to a bunch of economists, journalists who cover the White House, and Fed watchers. The broad consensus for why the White House has never blamed the Fed seemed to be this: the Biden administration also got the inflation conceptually wrong initially, agreeing with the Fed that it was all negative supply-shocks and so “transitory.” By the time it became clear and obvious that that wasn’t the case, it would have been politically extremely difficult (maybe even dangerous) to attempt to deflect blame towards the Fed.

Why? Well, consider the timeline. Inflation takes off through 2021. Biden echoes the Fed in calling inflation temporary that summer. He then re-appoints Fed chair Jay Powell to his position in November, just as it becomes fully obvious this was also a problem of too much spending throughout the economy. Pivot to blaming the Fed and (as Judge Glock notes), Biden would have had to justify why he recently reappointed Powell given he now thinks that Powell got things horribly wrong. What’s more, a lot of well-known economists would still have criticized the administration, arguing that that the American Rescue Plan stimulus made the Fed’s job more difficult.

Bringing attention to the role of excessive macroeconomic stimulus would have not only made it obvious that the White House made intellectual errors, but exacerbated complex debates about the interaction of fiscal and monetary policy. It wouldn’t have been easy for the White House to navigate all this given the public’s poor base knowledge of macroeconomics, particularly given the administration would have still wanted to claim credit for a solid performance for real output and employment, albeit washing their hands of the price level surge.

It’s pretty obvious from various polls and surveys that many Americans don’t really understand monetary policy or the Fed’s role in causing inflation. This is not limited to the general public, however. I’ve noted a few times that YouGov doesn’t even list the Fed for censure when asking the public “who or what was to blame for high inflation?” So, as the Washington Post’s Heather Long told me, in blaming the Fed, the Biden administration would have had to explain what the Fed does and hope that the public didn’t just perceive it as “part of the government,” the responsibility for which they would still ultimately pin on Biden. That would have been extremely challenging, no doubt souring relations with the Fed with the possibility of little political upside.

As it happens, a bunch of heterodox economists and left-wing groups then provided Biden and Harris with another boogeyman: companies. Once it became clear that much of the public was susceptible to the argument that corporations, market power, or collusion were meaningful sources of inflation, the White House went all-in on kook economics. So we got narratives about price inflation stemming from “junk fees,” “corporate greed,” “price gouging,” anticompetitive conduct, and even “shrinkflation” — microeconomic explanations for a macroeconomic phenomenon. After that, there was no turning back.