Sobriety Is Not Severity

Ms. Andracchio offers a thoughtful comparison between the Bank of Japan’s recent rate increases and the Federal Reserve’s decision to cut rates. While the comparison is illuminating in many ways, I believe it misses a crucial point: the economic contexts facing these two central banks are fundamentally different, and so their appropriate policy responses should differ as well.

Consider the starting conditions. Japan spent a generation struggling against deflation, characterized by insufficient demand, an aging population, and a corporate culture deeply resistant to price increases. When inflation finally arrived, it came largely as an external shock—energy prices, import costs, a weakening yen—landing on an economy that had been desperate for any inflation at all.

America’s inflation story could not be more different. Ours emerged from a combination of pandemic distortion, fiscal stimulus, supply chain disruptions, and demand that surged back faster than anyone anticipated. And in response, the Fed did not “hope” the problem would resolve itself, as Ms. Andracchio suggests. The Fed engineered the most rapid monetary tightening in decades, raising rates from near zero to over 5 percent in roughly eighteen months. The fact that inflation has not yet reached exactly 2.0 percent does not mean the Fed has been passive—it means inflation is a lagging indicator that responds slowly to policy changes.

This brings us to the core disagreement. Ms. Andracchio argues that the Fed should “hold rates steady until inflation is actually at target—not falling toward it, not projected to reach it eventually, but there.” This prescription, while intuitively appealing, overlooks the fundamental reality of monetary policy: it works with a significant lag, typically eighteen to twenty-four months. By the time a central bank can be certain that inflation has reached exactly 2.0 percent, it may have already overshot into unnecessary economic contraction. Central banks must act on forecasts, not just on backward-looking data. That is not imprudence—that is how monetary policy necessarily operates.

There is also the matter of the Fed’s dual mandate. The Federal Reserve is charged by Congress with promoting both price stability and maximum employment. Ms. Andracchio acknowledges this mandate but treats the employment side as a secondary concern—something to note before returning to the primary issue of inflation. But the softening in America’s labor market is real, and it represents genuine risk to millions of workers and their families. A responsible central bank cannot dismiss these concerns simply because inflation has not yet reached its target to the decimal point.

Ms. Andracchio makes a broader argument that the Fed should keep rates elevated to impose “fiscal discipline” on Congress—that higher borrowing costs would force legislators to confront the deficit. This argument, however well-intentioned, fundamentally misunderstands the role of central bank independence. The Fed’s job is not to serve as Congress’s budget enforcer. When monetary policy is used as a tool to influence fiscal decisions, a dangerous precedent is created: political actors may soon demand that monetary policy serve their electoral interests, and central bank independence—one of the most important institutional achievements of modern economic governance—could be compromised.

Moreover, the mechanism Ms. Andracchio describes does not work as advertised. Higher interest rates do not “tell the truth” to Congress; they increase the government’s interest expense, meaning taxpayers end up paying more for past borrowing decisions. This is not fiscal discipline—it is simply higher finance charges. If we want genuine fiscal responsibility, we must pursue it through the democratic process: taxes, spending priorities, and entitlement reform. These are difficult political conversations, but they cannot be outsourced to the Federal Reserve.

As for Japan’s approach, Ms. Andracchio presents the Bank of Japan’s rate increases as a model of prudent normalization. This may prove correct, but it is worth noting the substantial risks involved. Japan carries a debt-to-GDP ratio of 230 percent—more than double America’s ratio. Rate normalization in that environment is not simply an economic adjustment; it is a stress test for government financing, banking portfolios, pension funds, and the complex global ecosystem built around ultra-low Japanese yields. If the Bank of Japan succeeds in normalizing rates without destabilizing these systems, it will be a remarkable achievement. But success is not guaranteed, and Japan’s particular circumstances make its experience difficult to generalize to the American context.

Finally, Ms. Andracchio invokes Paul Volcker’s dramatic rate increases in the early 1980s as a model for Fed resolve. But the comparison is inapt. Volcker raised rates to 20 percent because inflation expectations had become completely unmoored, wage-price spirals were entrenched, and the Fed’s credibility had been thoroughly squandered. Today’s conditions are categorically different. Core PCE at 2.8 percent is elevated, but it is not the double-digit inflation of the 1970s. Inflation expectations remain well-anchored. The labor market, while resilient, is showing signs of cooling. The Volcker precedent applies to a different diagnosis.

What questions should we be asking? What do inflation expectations look like—and by most measures, they remain anchored near the Fed’s target. What do wages look like relative to productivity? What does the labor market look like beneath the headline numbers? What is the distribution of risks between persistent inflation and unnecessary unemployment? Central banking is risk management under uncertainty. It requires judgment, humility, and careful attention to incoming data.

Here is the essential point: Japan’s economic path is Japan’s path; America’s path is America’s path. The Fed may indeed cut too early or hold too long—that uncertainty is inherent in monetary policy. But cutting rates while inflation remains somewhat above target is not, by itself, evidence of irresponsibility. It can be a rational response to tightening financial conditions, slowing employment growth, and the forward-looking reality that policy affects the economy with substantial delay.

Sobriety is not the same as severity. A sober central bank does not prove its virtue by keeping rates elevated until the final decimal point complies. It proves its competence by navigating skillfully between two genuinely bad outcomes—entrenched inflation on one side and needless recession on the other—while maintaining both its independence and its credibility.