The Fed’s January Statement, Outlook and Actions

By at 30 January, 2020, 10:32 am

by Raymond J. Keating-

The Federal Open Market Committee (FOMC) statement released on January 29 left the federal funds rate unchanged at a range of 1.5 percent to 1.75 percent, and left the Fed’s mixed take on the economy in place as well. However, other recent changes by the Fed are cause for some concern.

The Fed highlighted solid job gains, but moderate economic growth. It pointed to household spending rising at a moderate pace, but business investment and exports being weak.

A clear good news item was inflation “running below 2 percent,” but the Fed also made a point of saying that it was looking for “inflation returning to the Committee’s symmetric 2 percent objective.” It’s peculiar, and always troubling, to hear monetary authorities talking about inflation, in effect, being too low.

On that note, it’s worth taking a look at two charts.

The first is the monetary base (currency in circulation plus bank reserves), which is what the Fed has direct control over in terms of running monetary policy, over the long run. That makes clear the drastic and unprecedented move to loose money that the Fed made in the summer of 2008.

Source: Federal Reserve Bank of St. Louis, FRED

The second chart shows the Fed starting to rein in its loose money policy starting in either the fall of 2015 or the fall of 2017 – but which has been partially reversed since September of last year.

Source: Federal Reserve Bank of St. Louis, FRED

It’s always dangerous when the Fed plays the loose money game. The best case scenario is that the damage done is limited to increasing the amount of risk and/or uncertainty in the economy. The worst case is that the effort to goose up inflation a bit winds up careening out of control. Hence, the reason why the Fed should be exclusively focused on maintaining price stability.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.


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