Tighter Fed Policy? A Review of the Facts

By SBE Council at 1 August, 2024, 6:24 pm

by Raymond J. Keating -

The Federal Open Market Committee (FOMC) latest statement on monetary policy opens: "Recent indicators suggest that economic activity has continued to expand at a solid pace."

That would be good news, if I weren't so suspect of what's considered "solid" economic growth these days. Diminished expectations for the U.S. economy seems near ubiquitous.

However, the Fed correctly noted, "Inflation has eased over the past year but remains somewhat elevated."

In the end, based on this statement, Fed policy remains unchanged: "In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent."

The Fed also declared that it "will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities."

While that last point is welcome, as is the case with statements by all policymakers, it requires verification.

In terms of the money supply, the Fed has direct control over the monetary base (i.e., currency in circulation plus bank reserves). As noted in the first chart below, and as I have pointed out before, the Fed has been running loose monetary policy without precedence since 2008. The second chart indicates that the Fed started to make small moves to rein in loose money at the start of 2022. However, the Fed actually eased off for a year starting in March 2023. The past three months of data point to a return to some small degree of restraint.

Source: Federal Reserve of St. Louis, FRED

Source: Federal Reserve of St. Louis, FRED

The Fed has a long way to go to get serious about reining in the loose money that serves as the foundation for inflation, which certainly can be reignited and leaves a pall of uncertainty over the economy.

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 Economist and The Weekly Economist III: Another 52 Quick Reads to Help You Think Like an Economist.

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