Interest rates cut again, Fed to stop shrinking balance sheet in December: CEI analysis

Today, the Federal Reserve announced an interest rate cut of 25 basis points, in line with economists’ predictions. CEI senior economist Ryan Young says the real news is the Fed’s decision to stop decreasing its balance sheet, which could significantly affect inflation.

“The Fed wants to lower interest rates, but it doesn’t want to rush it. The Fed will likely follow this up with another rate cut at its next meeting in six weeks.

“Much more important is the news that the Fed will stop decreasing its balance sheet as of December 1, which roughly doubled in size during the pandemic. That doubling was a leading cause of the pandemic inflation. 

“Since about 2022, the Fed has slowly been shrinking its balance sheet back to pre-COVID levels, and still has a ways to go.

“The Fed’s balance sheet is a much more potent source of inflation than interest rates, because it directly affects the money supply. This is another sign that Fed is more worried about preventing a recession than it is about keeping inflation in check. Look for inflation to stay elevated for a long time to come if the Fed starts growing its balance sheet again.”