Inflation: The Fed and “Tightening”

By at 10 April, 2024, 3:08 pm

by Raymond J. Keating

The inflation news for March offered in the latest Consumer Price Index report from the U.S. Bureau of Labor Statistics wasn’t what anyone wanted to see or hear.

CPI inflation continued to run hot at 0.4 percent in March. Over the past three months, the annualized inflation rate ran at approximately 4.4 percent.

And over the past year, inflation registered 3.5 percent. Of course, the further back one looks, the less relevant the data for what we’re dealing with now, and perhaps what we’re looking at going forward.

Even with the progress made in inflation compared to the early 2021 to mid-2022 period, as noted in the following chart, there’s no getting around the fact that inflation has been volatile, on the rise, and far too high in recent months.

Source: Federal Reserve Bank of St. Louis, FRED

As for the discussion about how to get inflation further under control, the focus rightfully is on the Federal Reserve, since inflation ultimately is a monetary phenomenon. However, the focus by the Fed and talking heads on adjusting interest rates in order to manipulate economic and employment growth, while not unexpected given the sad state of thinking on inflation and its causes, is wrongheaded, counter-productive and a distraction from sound policy.

Specifically, tightening monetary policy isn’t about the Fed randomly pushing up interest rates. Instead, it should be about the Fed reining in the money supply. And the Fed has direct control over the monetary base, i.e., currency in circulation plus reserves.

Source: Federal Reserve Bank of St. Louis, FRED

Source: Federal Reserve Bank of St. Louis, FRED

Looking at the two charts above chart on the monetary base, an obvious question must be put forth: Is this tightening?

From December 2021 to February 2023, the Fed actually did rein in the monetary base a bit. But since then, the monetary base has been on an expansion path.

The ultimate cause of inflation isn’t too much economic growth or too much job creation. Therefore, the Fed’s attacking economic and employment growth – that is, working to undermine both – via interest rate hikes is futile and destructive.

Inflation, in the end, is about too much money chasing too few goods, as the old saying goes. Therefore, supply-side growth and reining in money growth is the right policy mix. Indeed, this is the policy mix that would provide a foundation for strong growth and low inflation, which is what we all want.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest books on the economy are The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist, The Weekly Economist II: 52 More Quick Reads to Help You Think Like an Economist and The Weekly Economist III: Another 52 Quick Reads to Help You Think Like an Economist.


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