For financial markets, September 2022 was one of the worst on record. A nonstop bear market has been created by a decline in stock prices in excess of 20 percent, just as national output declines for the second straight quarter. These indicators point to a continuing recession. Inflation pressures have, as of now, brought the thirty-year fixed-rate mortgage to a 6.7 percent rate, up 1.5 percentage points in the past six weeks and double what it was in January 2022. The Federal Reserve has instituted a series of sharp rate increases to tame the inflation. But this remedy, even if justified, will drive down stock prices in the short run and, by raising the cost of capital, could well further dampen economic activity. Wages have risen in nominal terms, but well below the rate of inflation.

We are now past the point where any government response to monetary issues can reverse this downward trend. Instead, what is necessary is a hard look at the wide array of social and business policies that have led to the current malaise.

Recall for these purposes that the basic definition of inflation is too many dollars chasing too few goods. The rate of inflation does not depend solely on monetary issues within the Fed’s domain—it also depends on changes in the stock of goods and services. Sensible economic policies that aid growth will thus tend to curb inflation even with bad or capricious decisions by the Fed. But conversely, foolish economic and regulatory decisions will compound the problem by shrinking the economic pie in area after area; a key tenet of progressive thinking harbors the sorry illusion that if the Fed does its job, governments and businesses—often backed by government power—are free to pursue all sorts of collateral ends, most of which are counterproductive.