Time for the Fed to Declare Victory on Inflation?
As the Federal Reserve wraps up its August meeting, questions remain as to the central bank’s current strategy to combat inflation. Since the start of the global recession in 2008, the Fed has taken unprecedented steps to boost the economy and to keep prices stable. The question now is: has the Fed done enough to declare victory on inflation?
Inflation Overview
Inflation is an economic term that refers to a rise in the general level of prices of goods and services. The Fed’s goal is to aim its policies to keep inflation from rising too fast and too high. The Fed generally views inflation that’s running around 2 percent annually as ideal, as it helps to keep the value of the U.S. dollar relatively stable and promotes steady economic growth.
The Fed’s Role in Inflation
The Fed is the government entity responsible for managing the nation’s money supply in order to keep inflation in check. The Fed can do this by varying the target for the federal funds rate, setting discount rates, managing Treasury debt, and buying and selling securities. When it does so, the Fed alters the money supply, affecting inflationary pressures.
The Fed’s Strategies Thus Far
Since 2008, the Fed has been in an easing mode, meaning it’s taken steps to stimulate the economy and reduce the cost of borrowing. This has included purchasing large amounts of Treasury bonds and other securities in an effort to reduce interest rates, making it easier for consumers and businesses to borrow money and to invest.
The Fed has used a variety of other strategies to manage inflation. These include:
• Expansion of Quantitative Easing (QE): Quantitative easing involves a significant purchase of US Treasury securities and federal agency debt. The effort was launched in late-2008 in order to lower long-term interest rates, making it easier for businesses and families to obtain credit. QE was halted in 2014, when the economy began to gradually gain traction.
• Directly Targeting Interest Rates: The Fed also directly sets a target for the federal funds rate. This is the interest rate banks charge each other for overnight loans. By setting a low rate, the Fed can encourage borrowing and facilitate economic growth.
• Reverse Repurchase Agreement (RRP): The Fed also sets a reverse repurchase agreement rate. This is the interest rate it pays when it borrows money from banks. By setting a low rate, the Fed reduces the cost of overnight finance, providing a boost to the money markets.
• Providing Liquidity: The Fed also works to provide liquidity to the markets by intervening in market operations. These operations help to shore up confidence in the markets and keep money flowing freely throughout the economy.
• Asset Purchases: Finally, the Fed also purchases various securities in order to reduce interest rates and provide stability to the markets.
Has the Fed Done Enough?
So, with all of this said, has the Fed done enough to declare victory on inflation?
The answer is: yes and no.
On the one hand, inflation has been relatively stable since the end of the Great Recession. This is likely due, in part, to the Fed’s policy of keeping interest rates low and providing liquidity to the markets.
However, it must also be noted that inflation has not consistently hit the 2 percent target the Fed generally sets. In fact, inflation has only reached or exceeded the 2 percent target for only one month in the past four years. This suggests that the Fed may need to do more to boost inflation and get the economy back on track.
What’s Next for the Fed?
As the Fed wraps up its August meeting, the central bank is unlikely to make any drastic moves. That said, the Fed may consider making further tweaks to interest rate policy in order to help ensure inflation doesn’t remain too low for too long.
The Fed could also use its remaining tools, such as asset purchases and direct interventions in markets, to help boost inflation. With the economy still in a precarious place and uncertainty remaining regarding long-term economic growth, the Fed may need to use all of its tools to make sure inflation doesn’t remain too low.
Inflation is a crucial factor in any economy, and the Fed has taken steps to make sure it doesn’t rise too fast or too high. The Fed has used a variety of tools to keep inflation in check and to help prop up the economy.
At this point, the Fed has likely done enough to declare victory on inflation, though it may need to take further action if inflation remains too low. As the central bank wraps up its August meeting, the world waits to see what kind of new strategies the Fed will implement to help ensure inflation remains stable.
