‘Inflation has come down in spite of the Fed, not because of it’

This is part of a series, “Economists Exchange”, featuring conversations between top FT commentators and leading economists

US Federal Reserve chair Jay Powell is earning plaudits these days because a scary spike in US inflation appears to be receding without major job losses or economic contraction.

But American economist Stephanie Kelton argues that the Fed’s role in creating a “soft landing” is wildly overstated. A leading proponent of modern monetary theory, she contends that higher interest rates do not always slow economic growth. When a mismatch between supply and demand causes inflation, governments are mistaken if they try to tame it by cutting government deficits and crimping demand. “A better way to resolve the imbalance is through boosting supply,” she argues.

To that end, she believes the White House ought to focus on building up the US economy’s ability to create more goods and services, by redoubling its efforts to stimulate investment in fighting climate change, building more housing and making childcare affordable.

Kelton, an economics professor at Stony Brook University in New York and a former adviser to Bernie Sanders’ 2016 presidential campaign, has decidedly nonconformist views. She considers rising bond yields to be a subsidy for “people who already have money”. So she thinks the US should stop selling Treasuries to fund the federal deficit and governments everywhere ought to invest in public jobs programmes so that workers who lose their jobs never become fully unemployed: “It would truncate downturns, provide income support where it’s needed and enhance price stability,” she says.

Her views challenge those of traditional economists and budget hawks, who are concerned that US government debt just topped $34tn. They contend that the fact that Covid-era fiscal stimulus was followed by rapid inflation is evidence that MMT has too benign a view of government deficits.

In this interview, Kelton offers her counterargument…