Refocusing the Fed

Refocusing the Fed

July 20, 2022
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If you follow the financial press, the conventional wisdom has come to the simple conclusion that the way to fight inflation is raising interest rates.  Unfortunately, this is just not true.  Yes, raising rates may slow the economy, but that alone won’t fix inflation.

Starting in 2009, for seven years the Federal Reserve held the federal funds rate at zero and yet inflation never accelerated.  So, if seven years of zero percent interest rates didn’t cause inflation, why would the last two years do it? Even though everyone talks about interest rates, it is really money supply growth that matters.  We follow M2 because that is what Milton Friedman told us to follow.  M2 is currency in circulation plus all deposits in all banks (checking, saving, money markets, CDs).

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