Why Congress Must Stop the Fed's Massive Pumping

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On
Tuesday, December 16, 2008 the Federal Open Market Committee (FOMC)
lowered the federal-funds-rate target from 1% to between 0.25% and
0%. According to the FOMC statement,

The Committee anticipates that weak economic conditions are likely
to warrant exceptionally low levels of the federal funds rate
for some time.

Another main reason behind the massive reduction in the federal-funds-rate
target is the suppression of emerging price deflation. The consumer
price index (CPI) fell by 1.7% in November from the month before.
This was the biggest monthly fall since 1947. (In July 1949 the
CPI fell by 0.9%.)

Most commentators regard deflation as a terrible thing that must
be countered as soon as possible. This is also the view of Federal
Reserve policymakers, in particular Fed Chairman Ben Bernanke. To
counter a possible deepening in price deflation the US central bank
– in addition to lowering the fed funds to zero – is pursuing
aggressive monetary pumping. In December the yearly rate of growth
of the Fed’s monetary pumping stood at 151.7% against 141.3% in
November and 2.6% in December 2007. As a result of the Fed’s pumping
its balance sheet jumped to $2.238 trillion from $0.9 trillion in
December 2007.

According to the latest
FOMC statement
, the US central bank is likely to raise its balance
sheet further in the months ahead.

Read
the rest of the article

January
10, 2009

Frank
Shostak is an adjunct scholar of the Mises Institute and a frequent
contributor to Mises.org. He is chief
economist of M.F. Global.

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