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ALMOST all Wall Street economists are calling for sharp Federal Reserve interest-rate hikes to slow the economy and halt inflation. One dissenter is supply-side economist David Gitlitz, from the New Jersey—based firm Polyconomics, Inc. He notes that successive Fed-funds rate increases have not stopped the central bank from expanding its balance sheet and increasing Reserve Bank credit at an inflationary pace. Consequently, the dollar is too low and the gold price, at $385 an ounce, is too high. Given the 7.4 per cent annual rate of increase in intermediate-goods prices (excluding volatile food and energy) during the last three months and the 15.4 per cent rate for crude material goods, Gitlitz frets that inflation could reach 5 per cent before long.

The Fed is targeting the overnight Federal-funds rate used by banks when they buy and sell reserves in the New York money market. Gitlitz argues that when banks anticipate a higher Fed-funds rate in the near future, they simply step up their reserve purchases at today’s lower rate. This increases the demand for bank reserves and bids up interest rates. Then, to maintain the original interest-rate peg, the Fed has to pump in more high-powered money. That process has fueled inflation all year.

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ALMOST all Wall Street economists are calling for sharp Federal Reserve interest-rate hikes to slow the economy and halt inflation. One dissenter is supply-side economist David Gitlitz, from the New Jersey—based firm Polyconomics, Inc. He notes that successive Fed-funds rate increases have not stopped the central bank from expanding its balance sheet and increasing Reserve Bank credit at an inflationary pace. Consequently, the dollar is too low and the gold price, at $385 an ounce, is too high. Given the 7.4 per cent annual rate of increase in intermediate-goods prices (excluding volatile food and energy) during the last three months and the 15.4 per cent rate for crude material goods, Gitlitz frets that inflation could reach 5 per cent before long.

The Fed is targeting the overnight Federal-funds rate used by banks when they buy and sell reserves in the New York money market. Gitlitz argues that when banks anticipate a higher Fed-funds rate in the near future, they simply step up their reserve purchases at today’s lower rate. This increases the demand for bank reserves and bids up interest rates. Then, to maintain the original interest-rate peg, the Fed has to pump in more high-powered money. That process has fueled inflation all year.