Fed cuts interest rates and continues to decrease balance sheet: CEI analysis

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The Federal Reserve has cut interest rates by a predicted 25 basis points and also announced that it will continue to decrease its balance sheet, something that CEI senior economist Ryan Young says needs to continue in Trump's next term if the nation wants to win the fight over inflation.

"As expected, the Federal Reserve cut the federal funds rate by a quarter of a percentage point. It forecasted this move a while ago and would have done it no matter the election results. It will likely make another cut at its next meeting in six weeks.

"A more important, but less publicized, development is that the Fed will continue to decrease its balance sheet of government bonds by $25 billion per month. It grew that balance sheet by $5 trillion during the pandemic. This was the post-COVID inflation's key driver. Drawing it back was the key move in bringing inflation back down-moreso than interest rate hikes.

"If anything, the Fed should do a faster drawdown. At its current $25 billion monthly pace, it will take another 17 years to fully undo the Fed's panicked COVID buying spree.

"If the Fed starts growing that balance sheet again, that will mean the Fed has shifted back to stimulus mode. Higher inflation would follow about a year later, as happened during the first Trump administration.

"As the second Trump administration takes office in January, the Fed should resist Trump's pressure to stimulate the economy. These efforts could include jawboning, friendly appointees to the Fed's Board of Governors, and even a "Shadow" Fed Chair who would pressure Fed Chair Jerome Powell to cut interest rates and possibly grow the Fed's balance sheet again."