The Federal Reserve implemented its most confusing policies in its 100 year history. And they appear not to understand what they have done, nor why the economy reacted to their rapid interest rate increases in such a bipolar manner.
The Fed has two monetary policy tools: interest rates and money supply. Increasing interest rates depresses economic activity because the cost to borrow goes up. Conversely, increasing the supply of money stimulates economic activity because more liquidity is available to fund business transactions. The Fed implemented two contradictory actions: High rates and increased money supply.
But that’s not all. The Fed’s actions, to stop inflation by increasing rates, will not address the reason for inflation. It will only bludgeon the private economy with higher costs. In order for this approach to succeed, the rate increases may place the private economy into recession.
The reason we have inflation today is Fed action from 15 years ago. In 2008 the Fed Reserve printed trillions of dollars (quantitative easing), thus increasing the supply of money in the economy and thereby both stimulating economic activity and, most importantly, devaluing the buying power of every dollar in circulation. Dollar devaluation is inflation because it takes more devalued dollars to buy the same commodity.
The members of the Fed’s FOMC would be embarrassed if they knew how naked are their contradictory actions. We in the private economy certainly are aware, and are suffering because of the Fed’s contradictory actions. The Fed would better serve the private economy and reduce inflation should they reduce the supply of money.
Jay Davidson is Chairman, CEO, and the founder of a local commercial bank. He is a deficated capitalist and a student of the Austrian School of Economics. He believes the Constitution is the single Rule of Law and that it’s purpose is to keep the federal, state and local governments in check so that the individual citizen can live in liberty.