Federal Reserve Meeting

Keep in mind Milton Friedman’s description that “Inflation is always and everywhere a monetary phenomenon”

In their meeting last week, the Fed decided three things.

1. To lower inflation to two percent. No change.
2. To keep interest rates unchanged.
3. To slow the reduction of the Feds portfolio of debt instruments.

There are reasons for taking the third action.

1. The Fed wants to announce that their actions to reduce inflation are working and reducing the rate of bond portfolio reductions is a positive statement. When they sell bonds, they take the cash they receive out of circulation. A highly effective inflation fighting tool.
2. They may be under pressure from the Treasury department to add, not reduce, Fed holdings of treasury securities. Our government’s large deficits require the sale of large quantities of bonds.

Our view is that the Fed is dedicated to lower inflation and will achieve their goals. Their dedication stems from the actions they took when inflation picked up. When the Fed’s data said inflation, the Fed said temporary inflation, ignore. That turned out to be wrong and an embarrassment.

Consider Three Mile Island. The operators received data that something was wrong with a nuclear reactor and the system would automatically shut down for safety reasons. The human operators thought that must be a mistake and over road the automatic system. Wrong choice.

For the Fed, a lesson to learned, following the data and perhaps automating the inflation fighting process.

Finally, our projections are for a strong economy due to changes in corporations during the pandemic, and a successful campaign for the Fed’s fight against inflation. Embarrassed by their original inflation miss, they will fight a good fight.

*in the case of a discrepancy between Fidelity Investments monthly statements and Katz Family Financial monthly portfolio statements, Fidelity Investment statements should be deemed as the correct and accurate report source.