The Fed Can Effectively Fight Inflation If It Wishes To Do So
Yes, the Fed can effectively fight inflation if it wishes to do so. The dirty little secret is that the Fed can effectively fight inflation while it simultaneously lowers its Fed Funds rate. How? By shrinking the money supply. Aggressive QT is the answer.
The Fed has not been nearly aggressive enough in the execution of its QT program. The Fed grew its balance sheet by $5 trillion from February 2020 – May 2022 during its ill-fated QE program which helped drive the inflationary bubble we are living in. However, once the Fed shifted from QE to QT, it put kid gloves on. During its QT run (May 2022 – present), the Fed has only reduced its balance sheet by $1.44 trillion, a far cry from the break-neck pace of its inflation-inducing QE program.
I would like to see the Fed reduce its balance sheet by $120 billion per month ($90 billion of Treasuries, $30 billion of mortgage-backed securities) to precisely offset its previous QE actions. This is wishful thinking on my part given that the Fed is staffed with Liberal Keynesian economists who wish to grow the money supply and inflate the economy.
Further, despite the Fed’s rhetoric, its primary role is not to ensure stable prices and functioning markets, but to print money to subsidize Treasury debt.
We know that Yellen’s Treasury will run a $2 trillion deficit this year ending October 31st, which means Powell will be on the hook to print money to cover a significant portion of the forthcoming $2 trillion Treasury debt issuance in November 2024. Powell needs to tell Yellen “No, the Fed won’t bail out Treasury” and he needs to have that conversation now. Otherwise, how will the Fed ever meaningfully shrink the money supply if Powell is afraid to be Dr. No?