Is the Fed Really Serious about Inflation?

By at 28 July, 2022, 7:59 am


by Raymond J. Keating –

According to the Federal Open Market Committee’s statement on monetary policy released on July 27, the Fed “is strongly committed to returning inflation to its 2 percent objective.”

The evidence for the Fed’s seriousness supposedly is found in its jacking up the targeted range for federal funds rate to 2.25 percent to 2.5 percent. This comes after the June 15 move from 0.75 percentage point to a range of 1.5 percent to 1.75 percent. And the Fed noted that it “anticipates that ongoing increases in the target range will be appropriate.”

If you think that slowing the economy is the path to reining in inflation, then you should be just fine and dandy with these moves.

However, if one realizes that inflation is not about an overheating economy – that is, too much growth or job creation – then these moves are bewildering (though not unexpected given widespread misguided thinking on inflation).

More important in the Fed statement was the following: “In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities…”

To the degree that the Fed can rein in inflation, it’s always about pulling in excessive monetary growth. And no doubt, Fed policy has been wildly loose since the late summer of 2008. Looking at the trend in the monetary base (that is, currency in circulation plus bank reserves), which is the portion of the money supply that the Fed has control over, we see a welcome reining in since the start of this year. (See the following two charts.)

Source: Federal Reserve Bank of St. Louis, FRED

Source: Federal Reserve Bank of St. Louis, FRED

Again, to the degree that the Fed can play a role currently, it should be focused on price stability, and that means continuing what it started in early 2022 in terms of reining in the monetary base. No matter what’s happening in the economy, this should be the Fed’s sole focus.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest book is The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist.



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