PROTECTING SMALL BUSINESS, PROMOTING ENTREPRENEURSHIP

Stuck in the Past: The Fed vs. the Economy

By at 21 September, 2022, 6:47 pm

by Raymond J. Keating – 

The Powell Fed has its guns trained on this economy, with its thinking stuck far in the past.

The Federal Open Market Committee (FOMC) statement and accompanying economic projections released on September 21 offered nothing to be positive about in terms of where monetary policy is headed, and how the Fed sees it impacting the economy.

The Fed raised its target for the federal funds rate by 0.75 percentage points to a range of 3 percent to 3.25 percent, and “anticipates that ongoing increases in the target range will be appropriate.”

Regarding economic projections, the ranges offered by Federal Reserve Board members and Federal Reserve Bank presidents were grim in key areas.

First, real economic growth was projected by the Fed to run between 0.0 percent to 0.5 percent this year, and -0.3 percent to 1.9 percent next year. Projections were offered beyond 2003, but those simply amount to baseless economic guesses. In fact, in a striking moment of honestly and humility, Fed Chairman Jerome Powell admitted, more than once, during his press conference that no one knows where the economy is headed.

Meanwhile, as for inflation, PCE (personal consumption expenditures) inflation was projected at between 5.0 percent and 6.2 percent for this year, followed by a projected range of 2.4 percent and 4.1 percent in 2023.

And as for some kind of projections for Fed policy, the federal funds rate range was projected between 4.3 percent and 4.8 percent at the end of 2022, and 3.9 percent to 4.9 percent at the end of 2023.

In the end, the lone policy measure that was linked intelligibly to the economic realities of inflation could be found when the FOMC noted that “the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities.” And Chairman Jerome Powell at least emphasized price stability and reducing the size of the Fed’s balance sheet at his press conference.

In the end, however, the Fed seems to think that the current poor economy somehow is overheating and generating inflation (based on the bankrupt Phillips Curve idea that there is a tradeoff between economic and/or employment growth, and inflation), and therefore, is intent on further slowing the economy, that is, on inflicting additional economic damage. All of this somehow makes sense to the Fed and many Fed watchers. In reality, though, it reflects muddled thinking on the economy and inflation that was proven to be bankrupt decades ago.

And don’t forget that the economy also suffers due to the Biden administration and Congress working to raise taxes, increase regulatory burdens, and maintain protectionism on trade. This remains a dire policy combination for entrepreneurs, small businesses and their employees, and the overall economy.

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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