Fed Rate Increase the Right Move for Economy, Credibility

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As expected, the Federal Reserve raised the federal funds rate by a quarter percentage point.

CEI senior economist Ryan Young supports the move:

“The Fed was right to raise the federal funds rate for two reasons. One, after adjusting for inflation, the federal funds rate is still right around zero. That’s an expansionary monetary policy at a time when the Fed is trying to cut inflation. If anything, the Fed should consider another small increase in six weeks.

“Two, the rate hike is good for the Fed’s credibility. Today’s rate hike is the Fed’s way of saying ‘and we mean it’ about fighting inflation, even in the face of pressure from Congress and the administration to keep rates low. The more credibility the Fed has as an inflation fighter, the sooner inflation will go down.

“Companies think years ahead in their supply chain and purchasing decisions, and they factor expected inflation into those decisions. If they expect the Fed will hold firm on inflation, then the actual inflation rate will go down. If they expect the Fed to cave in to political pressure, then inflation could stay high for a long time to come.”

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