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Like many of you, I spent some time listening to Fed Chairman Powell recent witness on inflation and the economy. During two days, Mr. Powell answered hundreds of questions from dozens of lawmakers. Some asked about Bitcoin and other cryptocurrencies. Some wanted to know the Fed’s latest thinking on central bank digital currencies. And some wanted to talk about climate and energy policy. But these three questions were the most ubiquitous:

1. Why is inflation at a 40-year high of 8.6 percent?

2. What will the Fed do about inflation?

3. Can the Fed Reduce Inflation Without Causing a Recession?

Listening to the lawmakers raise the first question, I couldn’t help but think of the classic mystery board game Clue.

Many raised an open question: Why do we have all this inflation?, inviting the Fed chairman to name the culprit. Others tried to guide the witness by pinning the crime on a specific malicious actor.

It was Jerome Powell at the Federal Reserve with its massive balance sheet!

It was President Biden in the White House with the American rescue plan!

It was Vladimir Putin in Ukraine with tanks and missiles!

It was the corporate CEOs in their boardrooms with their price hike!

It was COVID-19 in every corner of the world with fragile supply chains!

Some, like Rep. Gregory Meeks (D-NY, 05) refused to point the finger of blame (25 minutes).

Isn’t it just a massive storm of everything that contributes to and causes inflation around the world? It’s a little bit of everything right? . . . I wouldn’t highlight anything. I should probably talk about the conglomerate of things.

He’s right, of course. Like me he wrote in February, many different things led us to where we are today. But to say that many things contributed to the rise in inflation is not the same as saying that each contributing factor is equally to blame. Some things matter a little, and some things matter a lot.

And it is important to try, as best you can, to find out which things have only been trivially added and which have contributed significantly to the increase in inflation.

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Economists are busy debating this question. As you might expect, even very intelligent people who do their best to untangle the jumble of potential contributors often come to wildly different conclusions. Some economists, especially Larry summers and Jason Furman-have consistently placed most of the blame on excessive monetary and fiscal stimulus, especially the $1.9 trillion American Rescue Plan Act (ARPA). approved by Congress last March. That’s not what researchers at the Federal Reserve Bank of San Francisco Found in October, nor is it consistent with what Mark Zandi and his team at Moody’s Analytics published earlier this year. Nor is it consistent with new research, released just this week, by the Federal Reserve Bank of San Francisco. This research finds that “factors other than demand account for about two-thirds of recent high inflation.” Specifically, only about a third of the jump (1.4 percentage points) in headline PCE inflation could be attributed to demand factors.

It’s not a debate that’s going to be resolved anytime soon—okay, it’s never going to be resolved—but it’s an important one.

Because?

Because if we misdiagnose what’s driving the inflation problem, it increases the likelihood that we’ll end up choosing the wrong treatment. We could do something that is ineffective or something that makes the situation even worse.

And that brings me to the next set of questions that lawmakers repeatedly raised. How does the Fed plan to reduce inflation and can it do so without throwing the economy into recession?

At this point, we all know the answer to the first of these questions. The Federal Reserve is raising interest rates and plans to keep doing so until… well, we don’t know exactly when it will stop tightening (or reverse course). What we do know is that President Powell cross that interest rates will likely need to rise “above neutral” to a “moderately restrictive” level and that he acknowledges that the economy may slip into recession as financial conditions tighten.

And while that may not be of interest to Larry Summers, who is instant Powell to do whatever is necessary, incl leaving millions of people out of work—Slaying the dragon of inflation is a deeply worrying scenario for many other observers. His. Elizabeth Warren (D-MA) and MP Ayana Pressley (D-MA, 07) were among dozens of lawmakers who pressed Powell on whether to rely on the heavy-handed tool of interest rate hikes to deal with inflation. Here is Senator Warren:

Bloating is like a disease and the medicine has to be tailored to the specific problem, otherwise you could make things much worse. Right now, the Fed has no control over the main drivers of rising prices, but the Fed can curb demand by laying off lots of people and making families poorer.

Echoing this theme, Representative Pressley said:

The Fed has a role to play, but the wrong drug can cause even more harm and make the patient sicker.

Powell pushed back though recognized that interest rates and the Fed’s balance sheet are “notoriously blunt and imprecise,” which led Pressley to observe:

There is an old saying that if all you have is a hammer, everything looks like a nail… The Fed knows that raising interest rates will not address the root causes of rising prices… we need a more sophisticated set of tools.

Like many of the Democrats who questioned Powell, Pressley is worried about the inevitable collateral damage — to people’s lives and livelihoods — that comes from swinging around an imprecise sledgehammer. Instead of raising the overnight rate and allowing it to indiscriminately raise borrowing costs across our economy, Pressley suggested that it might be helpful for Congress to pass legislation that expands the Fed’s toolkit so it can “tailor a more precise response to inflation.” His time ran out before he could fully elaborate, but he hinted at what an expanded toolkit might include:

Regulate the availability of credit in specific sectors of the economy that experience high inflation without affecting other sectors.

Hearing that, I immediately thought of it this report published by MMT scholar Nathan Tankus in January. The ideas are worth thinking about, even if we’re not likely to see a change to the toolset anytime soon.

For now, we are trapped in a world where too many people are still convinced that conventional currency is the best weapon against inflation. Maybe we’ll get lucky and inflation will trend down steadily before the proactive efforts to curb it put the economy into recession. But like me written before, I wouldn’t bet on it.

I think we need a different approach.