In a thought-provoking column on Friday, former Federal Reserve Bank of Minneapolis President Kocherlakota asked if the Fed is playing politics with interest rates.  As he points out, this is a troubling prospect, albeit wholly an unproven one.  What doesn’t need proof, though, is that interest rates are playing a deadly game with politics.  Last Tuesday, economic theory met political reality in yet another collision in which voters made it at least as clear as they did in 1980 that they won’t put up with low rates if they lead to high prices and the economic inequality it exacerbates.  The Fed has a profound, albeit de facto, fiscal role. Failure to reckon with it poses risks not just to Democratic officeholders, but also to the Fed itself.

Last July, Jay Powell emphatically rebutted a Member of Congress who asked him about my view that the Fed has dramatically, if inadvertently, increased income and wealth inequality.  Then as before and after, the Fed chairman asserted that economic inequality is wholly an artifact of fiscal policy.  At his press conference on Wednesday, he did express sympathy for those dealing with high prices, but he still insisted that policy relief is beyond the Fed’s reach as stipulated in its statutory mandate.

Later this month, I’ll present a paper showing that the Fed’s full statutory mandate requires attention to the “general welfare” and other equality drivers.  I’ll also lay out how seemingly pure monetary policy has become a real, dominant fiscal power by virtue of its size and scope.  Thus, the Fed may be independent in the august sense central bankers enjoy, but it’s anything but apolitical in terms of its impact.  It makes choices as to the market valuations it tolerates, the credit it allocates, how much federal debt it monetizes, and even how money now consists as much of Treasury obligations as bank reserves.

The Fed cannot have its cake and eat it too, taking credit for what it likes about the macroeconomy and blaming what it implies to be do-little fiscal policy for what it doesn’t.  Monetary and fiscal policy are a nexus in which the Fed – by virtue of its enormous market impact – often hold the deciding monetary and fiscal hands.

For now, voters are blaming politicians, not the central bank.  This makes sense because most Americans don’t even know we have a central bank, let alone what one is.  But, the Fed’s history – especially that in the 1980s – suggests that the Fed can’t duck blame for long.  Ultimately, it pays the same political price as White House and Congressional incumbents on whom voters visit their economic wrath.

Mr. Powell tried to deflect this anger by saying on Wednesday that “transitory” inflation doesn’t mean short term correction, it’s just a way of saying that high prices aren’t forever.  He had better, though, hope that inflation now is indeed short-term and supply-chain lubrication not just slows its pace, but also reverses some of its costs.

Voters won’t wait until after the 2022 election to decide if diapers, gas, food, housing, child care, and pretty much everything else they need right now cost too much. They may forgive temporary hikes in gas prices and even a slow fade of their hope of home ownership, but the majority of Americans living paycheck to paycheck have so thin a margin of financial error that their political verdict is still likely to be vindictive if real wages don’t quickly go up enough to offset the cost of essential household goods and services.