The Federal Open Market Committee’s September meeting concluded today, and the outcome is another increase in the base interest rate, an additional 0.75 percent. The third interest-rate hike demonstrates Fed’s concerns about inflation. Three consecutive meetings, three consecutive interest-rate hikes. It’s clear that the Fed still sees inflation as a continuing threat.
A quick look back shows an increase in the money supply, M2, after Sept. 11, 2001, after the Great Recession of 2009, and especially after the pandemic set in. All three represent the government’s attempts to keep the economy rolling in difficult times. And although the correlation isn’t perfect, all three increases in the money supply were followed by increases in inflation. Those were followed by the government changing direction, restricting the money supply and increasing the prevailing interest rates to cool the economy and bring inflation under control.
The rate of change in the money supply, measured year to year, has been dropping quickly. Inflation fell in April, but that was temporary; it fell again in July but it’s still extremely high at 8.12%, year over year.
Few wanted to see another hike in interest rates, but it’s the only way to offset the economic shocks that have taken place since the pandemic set in.