The heat from the hawkish statement of Federal Reserve (Fed) Chairman Jerome Powell last Friday, the central bank's position to fight inflation has begun to be disputed.
In a paper released at the Jackson Hole summit, where Powell spoke last week, policymakers can't do the job alone and claim they could make matters worse with aggressive rate hikes.
Researchers Francesco Bianchi of Johns Hopkins University and Leonardo Melosi of the Chicago Fed wrote that raising interest rates alone is not enough to bring inflation back down.
The Fed can lower inflation only when government debt is successfully stabilized by a credible future fiscal plan, according to the paper.
The high level of the federal debt and the continued increase in spending from the government increase public perception that inflation will remain high.
Congress spent about $4.5 trillion on Covid-related programs where that spending has resulted in a budget deficit of $3.1 trillion in 2020, a shortfall of $2.8 trillion in 2021 and a deficit of $726 billion through the first 10 months of fiscal 2022.
As a result, large fiscal imbalances and reduced fiscal credibility could worsen the situation as higher rates mean the $30.8 trillion in government debt becomes even larger to finance.
Even so, many economists expect several factors to help lower inflation, which supports the Fed doing its job.
