Against Monetary Primacy

To reduce inflation, the Federal Reserve (Fed) raises interest rates. But every month with high interest rates increases the risk of a devastating recession. Recessions impose not only short-term pain in the form of widespread unemployment but also lifelong harm for many, as vulnerable workers 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 consequent sacrifices. 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 an alternative framework that relegates interest rate hikes 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 supply-side reforms to sectors facing bottlenecks, tighter fiscal policy, and more vigilant antitrust and consumer law enforcement. Between 2021 and 2023, the United States deployed many of these tools, albeit not necessarily motivated by inflation concerns. And while the Fed has received much attention for lowering inflation during this period, it likely had limited impact. Thus, our framework has descriptive power for the astonishing recent success in moderating excess inflation without causing a recession. That reality has, however, been missed—increasing the chances that the Fed keeps rates too high as the economy slows. 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 costly option. We assert that, in many but not all cases, the preferred option will not be elevated interest rates, and we propose reforms to enable other institutions to respond effectively to inflation alongside the Fed. This proposal would shift U.S. policy from monetary primacy to macroeconomic pluralism, which means leveraging an array of economically beneficial (or at least less harmful) 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.