Diana Furchtgott-Roth: A New Energy Policy Could Help Curb Inflation

The Federal Reserve doesn’t have to tackle inflation alone. Diana Furchtgott-Roth, the former chief economist for the Department of Labor under the Trump Administration and an adjunct professor of economics at George Washington University, says that an adjustment to President Biden’s current energy policy could help to alleviate the supply chain issues contributing to inflation. Oil is central to this conversation.

President Biden started his first week in office with several energy related executive orders, including suspending new oil and natural gas leases on public lands and reviewing current leases. These orders were the actualization of Biden’s campaign promises, but in the wake of the Russian-Ukrainian war and the subsequent suspension of oil imports from Russia, the policy is proving to drive up energy prices and exacerbate supply chain issues, according to Furchtgott-Roth.

“Energy has been the big driver. President Biden could lower oil prices by about $10 to $20 per barrel if he went back on his previous policies that put a lot of areas off limits to drilling. If he put those areas back, then we could have an effect on the inflation rate,” Furchtgott-Roth tells GlobeSt.com. “The Fed needs to work together with the administration.”

Increasing the Federal Funds rate is the standard response to inflation, but according to Furchtgott-Roth, inflation cannot be quashed until the Fed Funds rate exceeds the rate of inflation. With the current inflationary rate at about 8.5%, the Fed has a long way to go. If the Fed increases rate hikes to 50 basis points, as would be Furchtgott-Roth’s recommendation, the Fed Funds rate will reach 4% by the year end. “That is way lower [than the rate of inflation]. We have never gotten rid of inflation with a federal funds rate that was lower than the inflation rate,” she says. The Fed Chairman Jerome Powell has already announced a likely 50 basis point rate increase in May with more to come.

By Furchtgott-Roth’s estimate, real inflation is at about 4% with supply chain issues driving inflation up an additional 4.5%. “If we worked out some of our supply chain problems, that could probably help the inflation rate, which would mean the additional six rate increases this year would have an effect,” she adds.

Her recommendation: start drilling in North America. “We do have the power to get the oil rate down,” she explains. “The North American oil platform is one of the most efficient and productive in the world. We have the largest oil and gas reserves anywhere in the world, and we could be importing more crude oil from Canada and refining it here.”

This plan would come at an environmental cost as well as a political cost for an Administration that is trying to achieve carbon neutrality by 2050. However, Furchtgott-Roth says that objections are unfounded. “It doesn’t make any sense from a climate change perspective because the oil that we produce here is much cleaner in terms of production than the oil that is produced in Venezuela and Iran,” she explains. “We have stricter regulations about production. It is all perception. Politics is a lot about perception.”