.jpg)
They have stated clearly that they plan on raising interest rates and selling off some of their $4 trillion in bonds on their balance sheet this year. They have already increased the Fed Funds Rate to 1% so they are implementing their intentions. We have not heard of any sell off of bonds yet. That means they are tightening money supply in the system. A tightening could lead to an eventual recession but that is most likely far down the road. The argument against their actions is fairly weak but important.
The argument is about what the Fed’s job is supposed to be. Their mandate is narrow but clear and that is to help control inflation and promote a steady, strong economy. The Fed has set a target for inflation at 2% and we remain, for years now, stubbornly below that number. The economy’s long-term, healthy growth rate is 3%, we are in the 2% range and have not reached the long-term average since the great recession. So what reason does the Fed have to raise interest rates and sell bonds?
In fact they may cause the inflation they want. If they raise rates they raise costs to borrow and that cost is passed on to consumers. Maybe they should take it very slowly. The reason they are tightening money supply is so that they can loosen it in the next recession. This is the purpose of their current actions that no one is talking about. To be honest rates should be higher but there is real danger in increasing them.
