ECONOMYNEXT – The US Federal Reserve reserve said it would reduce the volume of Treasuries it is selling down each month (so-called quantity tightening), to 25 billion dollars from 60 billion, but would continue to target its policy rate at 5.25-5.30 percent.
The Fed would continue to sell down mortgage backed securities against liquidity in the banking system by 35 billion dollar a month.
The Federal Reserve targets both inflation and jobs, (indirectly economic activity), but generally ignores money supply developments under Jerome Powell.
Under Powell, where inflation rose to 40-year highs, as projected by classical economists, the concept of ‘excess’ liquidity has also been removed.
“Recent indicators suggest that economic activity has continued to expand at a solid pace,” the Fed said in a statement.
“Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated.
“In recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation objective.”
The move came as some classical economists warned that inflation would fall and the economy would move into a recession based on money supply developments and past trends.
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Broad money, measured by the Fed itself is shrinking in absolute term, a phenomenon that has been rarely seen in the US. However the Powell Fed no longer watches money supply.
There are increasing reports of US consumer slowdown especially in restaurant sales, which have been generally attributed to inflation. This includes lower end chains like McDonalds.
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Meanwhile US bond yields have also edged up, and some banks are seen to be placing liquidity in the Fed’s standing facility, even as repo volumes come down (cash placed by banks in the Fed against securities).
The Fed created the Great Depression after inventing the policy rate by stealth in the mid 1920, without broader discussion or Congressional approval.
The Fed also printed money in the 1960s for various objectives by inflationary rate cuts driving up consumer prices across the globe, and eventually busted both the both the Bretton Woods system and what remained of the gold standard after the policy rate, critics say.
Sri Lanka’s first trips to the IMF also began as the island failed to follow Fed rate hikes in step and instead printed money (quantity easing) for rural credit re-finance and to sterilize interventions.
Since 1978 in particular, Sri Lanka has tried to run monetary policy without a credible anchor or with conflicting dual anchors.
The full statement is reproduced below
Federal Reserve issues FOMC statement
Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have remained strong, and the unemployment rate has remained low. Inflation has eased over the past year but remains elevated. In recent months, there has been a lack of further progress toward the Committee’s 2 percent inflation objective.
The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals have moved toward better balance over the past year. The economic outlook is uncertain, and the Committee remains highly attentive to inflation risks.
In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.
The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage‑backed securities. Beginning in June, the Committee will slow the pace of decline of its securities holdings by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion. The Committee will maintain the monthly redemption cap on agency debt and agency mortgage‑backed securities at $35 billion and will reinvest any principal payments in excess of this cap into Treasury securities. The Committee is strongly committed to returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Philip N. Jefferson; Adriana D. Kugler; Loretta J. Mester; and Christopher J. Waller.