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Supply chain issues and strong demand are fueling inflationary pressures


We are all feeling the effects of high inflation right now. But what can be done to stop the current relentless rise of prices for food and gas and basically all the things? And how will we feel the impact of the steps that are taken to get it under control? I am joined by Donald Kohn. He is former vice chair of the Federal Reserve Board of Governors. Mr. Kohn, thanks for being here this morning.

DONALD KOHN: Good morning, Rachel. Good to be with you.

MARTIN: There are no easy solutions, as you know. But can you walk us through the rock and the hard place that the Fed is in right now?

KOHN: Well, I think you've characterized it well - the rock and the hard place. There are high inflation and very strong demands from people for goods and services, causing that inflation much stronger than can be produced by the available labor force. So people are bidding against each other for the goods and services, for the stuff they want to buy. The labor force can't produce it. People are bidding for the workers to produce it. That's driving up wages. So we've got prices and wages going up. The Fed - the rock and the hard place is the Fed wants to damp down that demand for goods and services, but not so far as to cause people to be unemployed. So they want to keep the labor market going well.

MARTIN: I want to play a remark that President Biden made yesterday. Let's listen to this.


PRESIDENT JOE BIDEN: There's a lot going on right now. But the idea we're going to be able to, you know, click a switch, bring down the cost of gasoline is not likely in the near term, nor is it with regard to food.

MARTIN: Is he right?

KOHN: Yes, he is right. Now, he and his options are limited here. He can do some things, as he's tried to do, to take the froth off the - take a little bit off of, like, the petroleum market by releasing petroleum reserves, leaning on the Saudis to produce more. He's worked on the shipping and the supply chain issues that have caused prices to rise. But that's very - neither of them is going to have a major, major effect. He has very few tools at his disposal. He could work on bringing more people into the country, legal immigration, taking down some of the tariffs that President Trump put on there. But obviously, those have political problems.

MARTIN: So the real lever here is monetary policy, which - that's the Fed's world, and interest rates are the tool that they can use to address this. Secretary of the Treasury Janet Yellen told CNN this week that she made a mistake by saying last year that inflation was going to be a short-term problem. You yourself on this program almost a year ago said something similar, that inflation would fall off in coming months. How did experts get this so wrong?

KOHN: Well, I think a couple of things happened. One is that some of the disturbances from the supply shock side of the economy - from COVID, waves of COVID infections and the Chinese shutting down their economy in order to deal with COVID infections - have kept the pressure on the supply side much longer than I or other people anticipated. Then you had the Russian invasion of Ukraine, which also - which took a lot of wheat and other food off the market. And the sanctions on Russia have taken oil and natural gas off the market. And so I think part of what we got wrong is there are repeated supply shocks. But the other part I think I wasn't as aware of as I should have been is just how strong demand has been, just what - how much the fiscal policy, the budget deficits and the easy monetary policy pushed up demand and has kept it strong.

MARTIN: Should the Fed have raised interest rates earlier?

KOHN: I think they could have moved a bit earlier. I think they could have - once they recognized the problem in the fall, they began to move pretty quickly. And at the time, I thought they might be - maybe should be moving a bit faster, but they've caught up. So I think they've recognized it. It took them a little while, but they've really taken steps not only to raise rates, but to start to run down their portfolio this month. And importantly, they've told us they're going to continue to raise rates, and that's had quite an effect on financial markets. So interest rates are higher, the exchange rate is higher, equity prices are lower, and that's going to damp spending.

MARTIN: Former vice chair of the Federal Reserve Board of Governors, Donald Kohn, we appreciate you taking the time to talk to us this morning, sir. Thank you.

KOHN: It's been good to be with you, Rachel. Transcript provided by NPR, Copyright NPR.

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