Make Kitco Your Homepage

'Long, dark period ahead of us' as Putin escalates in Ukraine and the Fed hikes another 75 bps - Art Laffer

Kitco News

(Kitco News) - On Wednesday, the Federal Reserve raised rates by 75 bps, and Russian President Vladimir Putin escalated the war in Ukraine through partial mobilization. This constitutes a crisis, said Art Laffer, Founder and Chairman of Laffer Associates, but it can be resolved through free markets and diplomacy.

"Free markets are never more important than during periods of crisis," he said. "As long as they're raising the [Fed funds] rate every bit, and not doing tax cuts and pro-growth regulatory policies, I think we're going to have a very long, dark period ahead of us."

Laffer, who advised President Ronald Reagan in the 1980s and is famous for his 'supply-side' approach to economics, claimed that tax cuts and simplified business regulations would increase the production of goods and services, which would in turn reduce inflation.

"We had tax cuts under Reagan, which increased output, employment, and production," he explained. "We increased the supply of goods, we tightened the money supply, and inflation just tumbled like a stone… This economy, under Biden and Powell, is doing just the opposite."

Laffer spoke with Michelle Makori, Editor-in-Chief and Lead Anchor at Kitco News.

The Fed's rate hike

The Fed's latest rate hike is a response to high headline inflation, which was 8.3 percent in August. At a press conference on Wednesday, Federal Reserve Chairman Jerome Powell vowed to keep raising rates until "the job is done." He suggested that it would be "painful" to bring inflation down to the Fed's target of 2 percent.

Laffer said that Powell is not doing enough.

"What you have to do to really bring inflation down is to let interest rates seek their own level," he said. "That's the real problem, and [Powell] has not done that."

Laffer added that the Fed's balance sheet, which stands at slightly below $9 trillion of total assets, is too large. He suggested that the current rate at which the Fed is selling off its assets, at $95 billion per month, is too slow.

"The balance sheet of the Fed got big, and inflation caught on," he said. "They should sell off the assets, off the balance sheet… and get those bonds out of the Fed's balance sheet, back into the market, so that interest rates can reflect what they should reflect."

'Fed sledgehammer' will cause a crash worse than 2008 but Bitcoin, Ethereum will hit new all-time highs by 2025

Public Spending

Laffer said that Fed tightening must be combined with fiscal policy to successfully tackle inflation.

"You need to combine [monetary policy] with tax cuts… and with less regulation, which this administration is not going to do," he said. "The Fed's trying to control inflation, and fiscal policy is trying to increase inflation."

He pointed to public debt being 123 percent of GDP, an "unfathomable" amount.

"We're paying people not to work and we're taxing them if they do work," he said. "People are leaving the labor force in droves, and we're pumping in huge amounts of money."

He added that "The Biden administration should be very expansive in the production of goods and services" through tax cuts and reduced business regulations.

President Reagan, who cut the top marginal tax rate from 78 to 28 percent, ushered in "a booming economy," causing prices to come "banging down," after a period of high inflation in the 1970s, according to Laffer.

"The good news is it took Jimmy Carter to get Ronald Reagan, and God knows the wonderful President that will follow Joe Biden," he said. "We will come out of this… When we do, we will have a very bright future for the U.S."

To find out Laffer's views on the war in Ukraine, watch the video above.

Follow Michelle Makori on Twitter: @MichelleMakori

Follow Kitco News on Twitter: @KitcoNewsNOW

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.