Critics of the Federal Reserve believe the Central Bank has created too much money, and that the excess money supply is driving up inflation. Lindsey Piegza, Chief Economist at Stifel, and Ross Mayfield, Investment Strategy Analyst at Baird joined Cheddar's Opening Bell to discuss.


Opening Bell

Does Printing More Money Cause Inflation?

Welcome back to cheddar is opening bell in an attempt to rescue the economy during the throes of the pandemic. The Fed increased the nation's money supply by 40% giving out stimulus to those who needed it most. But now as inflation surges to a 40 year high, many critics are pointing to the Feds spike in money supply as one of the main drivers of this hot inflationary environment. For more on this. Let's bring in lindsey Piegza, chief economist at Stifel and Ross Mayfield investment strategy analysts at baird Lindsay ross. You guys both have very different kind of views on this. So I'm excited to kind of dig through both of them. I'm gonna start with you Lindsay um you believe that the Feds rapid increase in the nation's money supply has been the main contributor to inflation break down your case? Well, I think it's been an additional contributor to inflation. When we look at this on a historical basis, inflation in the U. S. And across much of the developed world has been very similar. But that relationship broke down in the aftermath of Covid. Why is that? Well, what we see is that prices are rising at a faster pace in the US faster than really anywhere else in the rest of the world. Everyone is dealing with supply side constraints supply side price increases. But here at home we've added on an additional layer from the demand side resulting from trillions upon trillions upon trillions of dollars flooding into the market. So while Absolutely, I do contend that the vast majority of price pressures are stemming from the supply side. Again, price pressures that everyone else across the globe is dealing with. But the reason inflation is at such an elevated level here at home is because of that self induced secondary layer of price pressures stemming from the demand side ross. You have a slightly different take on this. There's no question that the money supply is an issue here, but but maybe not as significant. So I think as has been said, there's a lot of factors here. I do think that the fiscal impulse uh you know, particularly stimulus checks and enhanced unemployment across the last couple of years has been the main contributor to why the US recovery was stronger and faster than the rest of the world. And therefore while some of the inflation pressures have been more pronounced domestically, um on the other hand, you know, the monetary policy side of things, I do think that the Fed probably could have eased up at the very least on Q. E. A lot earlier than they did. The one thing I would contend is that, you know, early in March of 2020 these policies were, you know, if not necessary. We're instrumental in keeping the US out of a depression. I mean, the second quarter GDP fell um more than it had since the Great Depression, I think that, you know, with hindsight, you can clearly trace a line from some of these policies to inflation, but I'd argue that the inflationary pressure we're facing now is probably not as dire as the situation we would have been facing without many of these policies at the beginning of the pandemic lindsey to rosses point there. I mean, it does feel like this was something that the Fed had to do and had there not been other pressures, especially those those those those those supply side pressures that this money issue really wouldn't have led to the inflationary picture we have now. What do you think about that? Well, I I think it's very fair to say that we were facing unprecedented conditions and both the Fed and the federal government took steps to try and and support the U. S. Economy as we went through some of the toughest times, particularly the lockdowns. But we do have to recognize that while I will concede that these policies may have mitigated the pain on the way down, they're now causing additional pain as the economy is trying to recover, the Fed has lost control of inflation and it's rapidly trying to raise rates. But we have to remember that's only going to address that demand side of the inflation equation as I talked about earlier, raising the cost of capital, can tap down demand tap down investment, but it does nothing to address the inflationary pressures that we're feeling from the supply side. So even if the Fed tries to reverse course at this time or continues to reverse course as they are, it's likely that inflation remains quite elevated for some time until we see a turnaround in terms of the global policy response, not just to the latest V2 variant, but inevitably the next variant to emerge. Any thoughts on that ross. Well, I I would have to agree. I think the Fed has a very narrow path to a soft landing because of the supply side pressures. I mean, I would argue though that the Fed, you know, has no control over what china is doing to rein in Covid um in its country. You know, the commodity price spikes, we've seen that have been amplified by the war in Ukraine. So there are plenty of things outside of the control that are contributing to supply side pressures, number one of which is Covid 19 and has been for the last two years at the same time. Um no doubt about it, that the Fed probably should have been tightening policy a lot earlier and again, at the very least, um their QE program was still active as recently as March of this year when the inflationary pressures were clearly well entrenched. So, um no doubt the Fed could have probably acted a little bit earlier. But there's a lot there dealing with that's outside of their control as well, especially on the supply side. It does feel like the Feds tools or demand side. The issue is more supply aside and so it is in a really tricky position right now to get the soft landing. Even the Fed admitting no longer calling it a soft landing a soft ish landing, whatever that that may end up being. Let's get to the solution here. I mean, what do you think I'll start with you, ross is the key to kind of cooling down inflation. Does the Fed just need to create more money, so to speak here, to kind of overcome on that side or would that just exacerbate the problem? Yeah, I think more money would just exacerbate the problem at this point. You're already starting to see some individual states and localities, look at stimulus effects to uh combat, you know, inflation in their localities. Again, I think that would be counterproductive in the long run or you know, at a high enough level the Fed is on the right path. I mean, they have they have a limited set of tools that they can use to fight inflation. Their job owning very hawkish lee they're raising rates In 50 boys and 50 basis point increments for the first time in a couple of decades. Unfortunately, we're probably at the point where they need some help from both the private sector and some of the developments abroad to ease some of the supply side pressures. So the Feds on the right path, they probably started too late, but they're doing, you know what they can and unfortunately will probably need some help to stick to soft landing soft landing, it does feel like some outside source has to kind of have another angle to attack inflation. Otherwise, the Feds kind of singular angle of tackling, it's clearly so far not working. I know for you Lindsay, printing more money is not the option here, but what is the option? Well, I, I think to to the earlier point, yes, I do think the Fed is on the right path continuing to raise rates, although with the economy already showing signs of weakness, I would like to see the Fed back off to 25 basis point increments after the June meeting. So giving the economy at least a chance to have some sort of soft ish landing. That being said, addressing supply side pressures, I think a lot of that can come from private sector investment, but also reducing regulations and restrictions from the fiscal side, particularly at the ports trying to move product, get product out to the end. Consumer as fast as possible will help alleviate some of those price pressures. I really appreciate the insight from both of you lindsey Piegza, chief economist at Stifel and Ross Mayfield Investment strategist strategy analysts at baird