Fed Takes Steps in Right Direction

By SBE Council at 18 September, 2024, 9:13 pm

by Raymond J. Keating -

The Federal Reserve continues to do its high wire balancing act on the economy. The decision by the Federal Open Market Committee announced on September 18 saw the Fed inching in the right direction.

First, the Fed announced that it was lowering its targeted range for the federal funds rate by a 1/2 percentage point to 4.75 percent to 5 percent. The further we can move away from the Fed's wrongheaded attempt to manipulate the economy through interest rates hikes in order to reduce inflation and engineer a "soft landing," the better. (A quick reminder: Inflation isn't caused by too much economic or employment growth.)

Second, the Fed also said it "will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities."

That's the right policy to rein in inflation and the foundation upon which inflation ignites. After all, inflation ultimately is a monetary phenomenon, and reducing the monetary base (i.e., the part of the money supply over which the Fed has direct control) is essential.

But as noted in the above chart, the move in the right direction over the last few months barely scratches the surface of what the Fed needs to do. Let's be clear: the unprecedented looseness of Fed policy since 2008 has achieved nothing in terms of aiding the economy. To the contrary, it added to inflation risks and uncertainties, and we saw the result of that with the pandemic and its aftermath, as supply constraints and government ginned-up demand ignited the inflation fires for which loose money provided the kindling and fuel.

The Fed has a long way to go, but this latest FOMC statement is a start.

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Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist, The Weekly Economist II:52 More Quick Reads to Help You Think Like an Economistand The Weekly Economist III: Another 52 Quick Reads to Help You Think Like an Economist.

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