Making Sense of Monetary Policy and the Future of Inflation

Source: American Institute for Economic Research
by James L Caton

“High inflation rates have been making headlines since the beginning of the year. Inflation seems to have caught even investors by surprise. While I’m optimistic that inflation will fall over the next year, this belief is formed with the expectation that the stance of monetary policy should and will remain tight. The effective Federal Funds rate is currently 0.83 percent after spending nearly two years under 0.1 percent. The logic behind the increases in the federal funds rate, driven by simultaneous increases in the rate paid on reserves held at the Fed, is that higher interest rates indicate tighter monetary policy. This is an age-old wisdom inherited most plainly from Paul Volcker’s tenure at the Fed. But monetary policy no longer works the way it did under Volcker and Greenspan.” (06/10/22)