The “Humphrey-Hawkins Full Employment Act” named after Senator Hubert Humphrey and Representative Augustus Hawkins, was signed into law on October 27, 1978. It charges the Federal Reserve to pursue monetary policy to promote low rates of unemployment and inflation. This is the Federal Reserve’s so-called “dual mandate.”
Humphrey-Hawkins charges the Federal Reserve to obtain a 4% unemployment rate and a 0% inflation rate. Prior to COVID-19, the Federal Reserve pursued a 2% targeted rate of inflation, a rate that Congress judged as “close enough” when the chair of the Federal Reserve submitted the semiannual Monetary Policy Report to Congress.
With unemployment at 4%, the Federal Reserve is achieving its first mandate; however, it is failing its second one. Inflation is 7.1%, which is the highest level since February 1982. The “Rule of 70” gives the approximate length of time for something to double in value at a given growth rate. Since inflation is the growth rate of prices, the rule of 70 says that at 7.1% inflation, prices are doubling roughly every ten years. This means that $1 will have $0.50 in purchasing power after ten years and after 50 years, only a few pennies’ worth.
This clearly violates Humphry-Hawkins, so why doesn’t the Federal Reserve do something about it? The reason is that the Federal Reserve painted itself into a corner over the last two years. Interest rates have remained at 0% since March 2020 while the money supply has doubled. Low interest rates mean that people have dumped money into stocks and real estate trying to find a positive return, causing prices in these markets to surge. If the Federal Reserve tightens monetary policy, it threatens property and stock market crashes. Federal Reserve chair Jerome Powell just hinting at rates rising in March was enough to send the Dow down by 1,000 points.
The federal government has run a multi-trillion dollar deficit since the pandemic began. The debt-to-GDP ratio currently exceeds 100% and the Congressional Budget Office projects an additional $12 trillion in debt will be added by 2030. Running massive deficits is cheap if interest rates are low but becomes extremely expensive if rates rise. Rates rising to just 1990s levels would cause yearly interest payments to balloon to $2 trillion per year, more than Social Security and Medicare combined, likely bankrupting the federal government.
Economists who claim that inflation is a monetary policy, not a fiscal policy, are misguided. The concept of “fiscal dominance” explains what is occurring. Fiscal dominance says that the need for the government to finance massive deficits at low interest rates overrides all other monetary policy objectives. If the deficit and debt were reasonable, the Federal Reserve certainly would have increased interest rates by now.
The Federal Reserve needs to engineer a “soft landing” that reduces the rate of inflation while not bankrupting the government or causing markets to crash. Such a landing has not been attempted before. Let’s hope it is successful.
