The Fed Ought To Lower Rates and Shrink M2 To Fight Price Increases
The Fed could have lowered its Fed Funds rate last year and simply ramped up QT to absorb the excess capital that Treasury and the Fed injected into the economy from 2020 through today (in the case of Treasury, deficit spending is the only thing keeping the U.S. Economy afloat. Better to take our medicine now, but Washington D.C. is incapable of fiscal austerity).
The Fed will use today’s and next month’s CPI prints to hold off on cutting its Fed Funds Rate until after November’s General Election. CPI is a bogus measure as it is backward-looking and understates true price increases given substitution’s role in the CPI methodology.
I would love to see Powell push back on Congress/Treasury’s deficit spending. For every fiscal quarter that Congress runs a deficit, Powell ought to increase Fed Funds by 25 BPS.