Last week, the Federal Reserve raised the overnight lending target rate between member banks by 0.25 percent, and said it wants to remove some of the stimulus it provided with its quantitative easing programs. Put another way, it wants to take some of the excess cash out of the banking system over time. To do this, it will sell some of its bond holdings, or simply not reinvest them as they mature. The cash it receives from this will presumably vanish with the press of a keystroke, and any net profit will go to the Treasury.
Academically and in practice, there is more to it than that. However, that is a decent enough explanation for cocktail conversation, if you are so inclined to discuss monetary policy at social events. Trust me, I wouldn’t advise it unless you want to be lonely by the end of the evening. The only way I can think of to bore people more would be to quote Alfred Lord Tennyson during the conversation: “Theirs not to reason why, Theirs but to do and die.”
Frankly, that little snippet sums things up rather nicely I think. But what is the end result?
From a purist point of view, the Fed’s actions will ultimately slow the growth in the money supply. This is an effort to keep inflation in check, and will be effective as long as there isn’t a massive drop in the supply of goods and services due to events outside of the Fed’s control. Secondly, they have thus far telegraphed their intentions to keep from shocking the business community, and thereby disrupting future hiring and capital projects.
If it seems like the Fed is walking a tightrope, I guess it kind of is.
(Read the full article as previously published in the Montgomery Advertiser on June 19th, 2017)