Why Congress Must Stop the Fed's Massive Pumping

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.

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January 10, 2009

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