People have been calling on Congress to do something, anything about inflation, and rightly so.
The tip of the spear for the federal government’s fight against inflation is the Federal Reserve, the central bank of the United States. By raising interest rates, the Fed attempts to “pump the brakes” on the economy and slow down the pace of inflation. Congress has the responsibility to conduct oversight of the Fed to ensure they are responding to the needs of the American people.
But what actions can Congress directly take to help control the surging prices?
According to Claudia Sahm, a former Fed economist, “Congress has much more targeted tools [than the Fed]. It’s about making the system work more effectively, so all these costs don’t get piled up on individuals.”
Sometimes, Congress has taken the drastic step of directly setting price controls, as it did in 1942 as inflation skyrocketed along with the outbreak of World War II, though this was a highly controversial move.
Beyond that, Congress can also pass laws attempting to grow the supply side of the economy – increasing the amount of capital and labor – so that the economy can grow without demand driving up prices. This could encompass anything from improving education and increasing immigration to grow the workforce to promoting more domestic energy production.
However, these are largely changes that would take time to have an impact, if any at all. For instance, most economists agree that the Inflation Reduction Act passed by Democrats this year will not do much to bring down prices in the short-term, despite the title.
When it comes to tackling the immediate crisis of soaring prices, the Fed will make the most difference. As Douglas Holtz-Eakin with the American Action Forum wrote earlier this year, “If it looks like the answer to the question ‘what can Congress do to tame inflation?’ is ‘not much,’ you are correct. The reality is that Congress will have to rely on the Fed in the near term.”
Despite this, Congress can still do things to keep the economy running, such as passing a budget for the next year.