Against Monetary Primacy

Abstract

Every passing month of high interest rates increases the chances of massive job cuts and a devastating recession that still might come if the Fed maintains interest rates at their current levels for long enough. Recessions impose not only widespread short-term pain but also lifelong harms for many, as vulnerable populations and those who start their careers during a downturn never fully recover. Yet hiking interest rates is the centerpiece of U.S. inflation-fighting policy. When inflation is high, the Fed raises interest rates until inflation is tamed, regardless of the sacrifice that ensues. We call this inflation-fighting paradigm monetary primacy. Despite its great risks, monetary primacy has remained unchallenged by either political party and largely ignored by legal scholars.

This Article exposes monetary primacy’s incoherence and proposes precisely the opposite framework—one that relegates interest rates to a supporting role in the fight against inflation. Governments possess other policy tools for controlling inflation that are better situated to lead. Examples include strengthening antitrust and consumer law enforcement, allowing greater immigration, raising taxes, removing red tape in sectors experiencing bottlenecks, and reducing government spending. Between 2021 and 2023, the U.S. deployed many of these tools, albeit not necessarily motivated by inflation concerns. And while the Fed has received much of the attention for lowering inflation during this period, it likely had limited if any impact. Thus, our framework has descriptive power for the astonishing recent success in moderating excess inflation. But that reality has been missed, thereby increasing the chances that the Fed plows ahead with dangerously high interest rates.

Instead of monetary primacy, the Fed should set interest rates at a level that is best for long-term employment and price stability, known as the “natural” rate of interest. If inflation remains too high when interest rates equal the natural rate, then the Fed, the executive branch, and Congress should compare the sacrifice associated with raising interest rates above their natural rate to the alternative policy tools and choose the least-cost option. We assert that, in many but not all cases, the preferred option will not be elevated interest rates, and propose reforms to enable other institutions to respond effectively to inflation alongside the Fed. These proposals would move from monetary primacy to monetary pluralism, which means leveraging an array of economically beneficial tools. In both the short term and the long term, moving away from monetary primacy will help increase the chances of conquering inflation, avoiding a recession, and expanding economic opportunity.

Keywords: legal institutional design, consumer law, law and macroeconomics, antitrust law, immigration, tax law, Federal Reserve