Analysis: More of the Same from the Fed  

By at 31 July, 2020, 12:19 pm

by Raymond J. Keating-

The Federal Open Market Committee’s statement released on July 29 was more of the same from the Fed – depending on one’s perspective, for better, for worse, or for no real difference.

In the FOMC statement, the key point was, “The path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.”

As for policy beyond its fed funds target, since the pandemic has hit the U.S., the Fed has ramped previously unprecedented loose money to a still new level. As noted in the following chart, the monetary base (currency in circulation plus bank reserves) once again jumped in March, April and May, with some leveling off since.

Source: Federal Reserve Bank of St. Louis, FRED

The Fed somehow thinks that its unprecedented shift to loose money since the 2008-09 crisis has been a positive for the economy. But that’s hard to see, to say the least. Plus, as noted the chart below, loose money largely has fed into a vast expansion in bank reserves. That would indicate that, at best, loose money by the Fed hasn’t matter much at all, and that is most likely to be the case during the current crisis.

Source: Federal Reserve Bank of St. Louis, FRED

The performance of the U.S. economy in the coming weeks, months and years will rely on a host of factors, such as the path of the pandemic, the level of entrepreneurship and private investment, and a wide range of public policies, including tax, regulatory, trade, and government spending measures. At best, the Fed can run monetary policy geared toward maintaining price stability, or it can continue to run loose money, which will either create uncertainty, lead to inflation, or mean little.

For all of the grandiose declarations from the Fed as well as Fed watchers, we’re simply seeing more of the same from the Fed with little effect on the real economy.

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


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