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Fed Capitulation Is Official as FOMC Keeps Rates Steady

by Richard A Reagan

The Federal Open Market Committee voted last week to keep its target federal funds rate steady at 2.25 to 2.50%. Even more importantly, the FOMC voted to stop the Fed’s winding down of its balance sheet at the end of September of this year. And as of May of this year the Fed will halve the amount of Treasury securities that it can run off from its balance sheet from $30 billion per month to $15 billion per month.

With only about $500 billion having been run off the Fed’s balance sheet since it began drawing down its balance sheet, that will mean that the Fed’s balance sheet remains elevated well into the future. It’s still sitting currently at about $4 trillion, an incredible sum of money. And once it finishes its

drawdown, it intends to roll over principal payments from its holdings of mortgage-backed securities (MBS) into Treasury securities, with the possibility for up to $240 billion a year in new Treasury security purchases. That indicates a desire to get back to monetary easing, so that in a few short years the Fed could be right back to where it was before the drawdown. So what was the point?

The Fed at this point has basically thrown in the towel with respect to normalization of monetary policy. It will keep monetary policy accommodative for years to come in an attempt to stave off a stock market collapse. Stock markets greeted that with joy, as easy money means more money flowing to financial markets.

But that’s bad news for American families, who will face the resulting consequences of higher prices for food, housing, medical care, and other necessities. Combined with the higher prices on manufactured goods as the result of tariffs, higher food prices due to flooding in the Midwest, and higher housing prices as interest rates rise in the future, American households will be a lot worse off as a result of the Fed’s actions.

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