The Fed’s Mistakes Continue and the Economy is Paying a Heavy Price

By SBE Council at 14 December, 2022, 8:41 pm

by Raymond J. Keating  –  

The Federal Reserve announced on Wednesday, December 14 that it was raising the federal funds rate by a half-point to 4.25 to 4.5 percent.

The Fed added, “The Committee anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time.”

Meanwhile, the Fed also released its latest projections on the economy. The ranges on key measures were anything but encouraging.

For example, the range of estimates for real economic growth were grim, specifically, 0.2 percent to 0.5 percent in 2022, and -0.5 percent to 1.0 percent in 2023. Going beyond next year means venturing into pure guesswork, but it’s still worth looking at what the Fed is expecting, and that would be under-performing growth of 0.5 percent to 2.4 percent in 2024, and 1.4 percent to 2.3 percent in 2025.

At the same time, Fed projections on inflation are hardly reassuring.

The Fed’s range of projections for PCE inflation in 2022 is 5.5 percent to 5.9 percent, followed by a range of 2.6 percent to 4.1 percent in 2023. And looking out further, the Fed expects inflation to run in the range of 2.2 percent to 3.5 percent in 2024 and 2.0 percent to 3.0 percent in 2025.

As SBE Council has said before, the Fed raising interest rates in order to slow an already sluggish economy as the main means for bringing down inflation is counter-productive. The Fed’s lone positive in this policy mix has been working to rein in the actual money supply, which would begin to fix the Fed’s wrongheaded decisions that dominated from late summer to 2008 through the main troubles tied to the pandemic. (See the following chart.)

Source: Federal Reserve Bank of St. Louis, FRED

The right policy mix is not a mystery. That is, the U.S. needs pro-growth tax, regulatory, and trade policies, coupled with monetary policy exclusively focused on maintaining price stability.

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.