SBE - Small Business & Entrepreneurship Council

03/22/2023 | Press release | Distributed by Public on 03/23/2023 04:51

The Fed: Squeamish Over Its Own Mess?

By SBE Council at 22 March, 2023, 2:35 pm

by Raymond J. Keating -

The Federal Reserve backed off a bit compared to its recent aggressiveness in hiking the federal funds rate. On March 22, the Federal Open Market Committee announced that it was raising the federal funds rate by a quarter point to a targeted range of 4.75 percent to 5 percent.

Only a quarter point? Given recent bank woes, it seems that the Fed has grown a bit squeamish with the mess that it helped to create. (See our recent commentary.)

The following point from the FOMC statement confirmed one of our concerns:

"The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain."

In our recent commentary, we pointed out that "the fallout on regional banks could have a negative effect on American small businesses. Regional banks are big lenders to small businesses, and if this episode translates into those regional banks becoming more cautious in lending, then small businesses could face constraints in terms of access to credit. That, in turn, adds to overall economic concerns regarding the U.S. heading back into a recession, and how deep that might be."

But the Fed did reaffirm its commitment to staying "highly attentive to inflation risks" and "is strongly committed to returning inflation to its 2 percent objective."

That's good, as price stability should be the lone focus of any nation's monetary authority. And in terms of constructive policies, the Fed declared that "the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities, as described in its previously announced plans."

As noted in the following chart, that process really has only started. Indeed, the idea that the Fed is tightening is dramatically at odds with the reality of the foundation of the money supply, that is, the monetary base (i.e., currency in circulation plus bank reserves). There's a long way to go. This points to ongoing uncertainty regarding inflation, Fed policy and the economy, that has been around since late summer 2008.

Source: Federal Reserve Bank of St. Louis, FRED

At the same time, though, trying to manipulate the economy by manipulating interest rates never turns out well. While such thinking dominates government and markets these days, it must be understood that this results in increased uncertainty and diminished economic growth. If only the Fed would leave interest rates to the market.

Indeed, the Fed is squeamish about this mess … and so are we.

Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council. His latest book is The Weekly Economist: 52 Quick Reads to Help You Think Like an Economist.