Former Obama Treasury adviser in New York Times: ‘The Fed should make amends for its mistakes’

Steven Rattner, who served as counselor to the Treasury Secretary during the Obama presidency, called on the Federal Reserve to “make amends for its mistakes” in a New York Times column Wednesday. 

Rattner wrote that the Consumer Price Index report on Friday “made clear” that “inflation is raging, and the central bank needs to move more aggressively to cut off the upward spiraling of prices.” 

But, he said, “The Fed has yet to evince a full grip on this reality,” arguing that “far more substantial interest rate increases have always been necessary to restrain fast rising prices.”

The economist noted that while raising the interest rates are necessary, “higher rates slow inflation by slowing the economy, which in turn means fewer jobs, higher unemployment and often, a recession.”

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Rattner wrote that, in his view, a recession may be the price we have to pay for irresponsible Federal Reserve policies and challenging events on the world stage.

He argued that while the Russian invasion of Ukraine played a role in driving up prices, “so have policy errors, for which the central bank bears significant responsibility, along with the Biden administration.”

“The inflationary die was cast, in effect, by the response to the pandemic, well before Russian troops crossed the Ukrainian border,” he added.

“Borrowing a page from its successful response to the 2008 financial crisis, the Fed pushed interest rates close to zero and bought trillions of dollars of debt securities,” Rattner said, recounting the mistakes. 

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“The ultralow interest rates encouraged a surge in the value of a vast array of assets, from equities to houses to art. Meanwhile, a flotilla of government stimulus programs put more than $1 trillion of extra cash into Americans’ bank accounts,” he continued.

When Biden became president, “the mantra from the White House became that it was better to do too much than too little, an axiom that the Fed enthusiastically adopted,” but COVID was “substantially less daunting” economically than expected. 

Then, “To make matters worse, the Fed was inexplicably slow to reverse course, even when the need became glaringly obvious” as inflation proved stickier than previously predicted. As he noted, the Fed “continued to add mortgage securities to expand its balance sheet until just three months ago, when it also first raised interest rates.” 

Rattner called on the Fed to “make amends for its mistakes,” and “quickly,” by raising interest rates by 0.75%. Soon after the column was published, Fed Chairman Jerome Powell had announced a 0.75% interest rate increase.

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Rattner’s article, which criticized the Fed and President Biden for reckless spending, underscores the problems with the left’s “modern monetary theory” – the idea that the government can never run out of money so long as it uses its own currency. 

Powell and other mainstream economists have denounced modern monetary theory, but politicians like Rep. Alexandria Ocasio-Cortez have endorsed it.