The Federal Reserve continues to impose tighter money as a cure for inflation while refusing to indict looser money as the cause of it.
The Federal Open Market Committee (FOMC) this week offered “supply and demand imbalances related to the pandemic,” “broader price pressures,” and “Russia’s war against Ukraine” as causes of higher prices. The Federal Reserve, perhaps unsurprisingly, did not blame the Federal Reserve.
The central bankers caused this. Yes, the architects of monetary policy did it with the anarchists of fiscal policy holding a gun to their heads. But they did it.
Starting in the summer of 2019, the Fed began cutting very low, historically speaking, rates that eventually found their way to about zero. So late did the Fed intervene in this crisis that this non-rate rate remained in that nothing zone — despite the consumer price index soaring to 8.5 percent by March 2022 — well into the first quarter. When William Shakespeare warned “neither a borrower nor a lender be,” he did not anticipate the reverse usury that allows those hiring money to pay for it with money of a substantially lower value than the money received.
In September of 2019, the Fed injected hundreds of billions of dollars into the repurchase agreement (repo) market.
At about the same time, the Fed’s balance sheet stood at $3.8 trillion. By March, it had more than doubled to a record amount of almost $9 trillion.
Whatever the impact of lingering COVID supply-chain problems or of Russia’s invasion of Ukraine, the alpha and omega of our 8.3 percent annual consumer price index rate remains the sudden creation of trillions of dollars out of thin air by the Federal Reserve.
What good explodes in supply without its value plummeting? Money is no different from PlayStations, pumpkins, or petroleum in this regard.
Only when discussing money do intelligent people imagine away the laws of supply and demand. The Fed, which knows better, Jedi-mind-tricks readers of the FOMC statement by erasing monetary policy as a reason (even though it’s basically the reason) for our price problems. (READ MORE from Daniel J. Flynn: White House Inflation Reduction Act Party Crashed by 8.3 Percent CPI Report)
Wednesday’s increase of the federal funds rate by 0.75 percent, along with a promise to rein in the balance sheet, serves as a tacit admission by the Fed’s board members that they know the paramount importance of central bankers on the value of money.
This, at least, is encouraging. The Fed is going in the correct direction. Even if its board members refuse to verbally admit the complicity of the money supply in making the mess, they show, through their actions, that they know cleaning it up depends on the money supply.
The FOMC announced Wednesday that it “decided to raise the target range for the federal funds rate to 3 to 3-1/4 percent and anticipates that ongoing increases in the target range will be appropriate.” It continued: “In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in the Plans for Reducing the Size of the Federal Reserve’s Balance Sheet that were issued in May. The Committee is strongly committed to returning inflation to its 2 percent objective.”
Inflation hit an annual rate of 8.3 percent in August, so the Fed’s achieving its goal means the price of money grows dearer for all borrowers — individual, corporate, and, especially, governmental. The balance sheet shrank from a peak of $8.965 trillion in March to $8.816 trillion now. No one expects the Fed to pursue balance sheet normalization with the speed with which it pursued quantitative easing. But shrinking its holdings by 2 percent will not amount to anything that will noticeably control inflation.
The Fed need not adopt an educative role as the nation’s economics professor. But in suppressing the real reason for inflation (even as the Fed takes the opposite course to curb it) central bankers necessarily pave the way for future monetary mistakes.
Why not admit with words what the tightening measures already admit with policy?
Correction: As several readers note, the Fed changed its formula for M1, rendering the metric useless over the period referenced in the article. I removed references to M1 and allow the Fed balance sheet numbers to convey the point about loose money resulting in devalued money. — DJF