This Is What The Fed Should Do

This Is What The Fed Should Do

The Fed ought to begin a program of lowering its Fed Funds Rate and accelerating its QT program.

  • The Fed purchased $120 billion of Treasury and Agency securities per month during the height of QE. Therefore, the Fed’s QT program ought to be at least as large as peak QE.
  • The Fed’s mission as it relates to QT ought to have been to unwind the Fed’s QE-related balance sheet growth that took place from Q2 2020 through Q1 2022 (see chart below).
  • A QT program run correctly would remove monetary slack from the economy. The market would then set interest rates accordingly, obviating the need for the Fed to use the Fed Funds Rate as a policy tool.

I am all for the Fed flexing the money supply on extreme occasions. The bank runs of the Great Depression were one such occasion. Unfortunately, the Fed tightened the money supply during the Great Depression rather than expanding it. Similarly, one could argue that the Fed should have run a momentary monetary expansion program to offset the credit crunch that preceded the Financial Crisis of 2008-09. Instead, the Fed subsidized bank bailouts and ran a perpetual QE program which got the markets addicted to zero cost credit. Now we are paying the price for the Fed’s ultra-dovish monetary policy.

Source: Federal Reserve

2 thoughts on “This Is What The Fed Should Do

Comments are closed.