ECONOMYNEXT – The US Federal Reserve said it was cutting rates by 25 basis points to target 3.5 to 3.75 percent, despite high inflation,citing an economic slowdown and lower job gains in it so-called dual mandate.
Inflation was up 3 percent in October, 2025 with monthly inflation rising 0.3 percent.
“Available indicators suggest that economic activity has been expanding at a moderate pace. Job gains have slowed this year, and the unemployment rate has edged up through September,” the Federal Reserve said.
“More recent indicators are consistent with these developments. Inflation has moved up since earlier in the year and remains somewhat elevated.
“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run.
“Uncertainty about the economic outlook remains elevated. The Committee is attentive to the risks to both sides of its dual mandate and judges that downside risks to employment rose in recent months.”
All the principle payments of maturing Treasury securities will be rolled over.
Monetizing Government Debt
Maturing agency securities will be rolled over into Treasury bills.
The FOMC said its trading desk was now allowed to print money to maintain ‘ample reserves’ or excess liquidity without specifying an actual minimum level but authorised the trading desk to buy securities up to 3 years maturity.
It is not clear whether coupons would also be re-monetized to maintain ample reserves.
“Increase the System Open Market Account holdings of securities through purchases of Treasury bills and, if needed, other Treasury securities with remaining maturities of 3 years or less to maintain an ample level of reserves,” an FOMC implementation note said.
The so-called ample reserve regime had led to violent changes in commodity prices including foods and energy while stock markets boomed.
Inflation at first produces pleasing results classical economists have said which is why central bank which have rejected economics have an inflation bias.
“Inflation at first merely produces conditions in which more people make profits and in which profits are generally larger than usual,” classical economist Friedrich Hayek, wrote in Constitution of Liberty.
“Almost everything succeeds, there are hardly any failures. The fact that profits again and again prove to be greater than had been expected and that an unusual number of ventures turn out oto be successful produces a general atmosphere of favourable risk taking.
“This situation will last however only last, however, only until people begin to expect price to continue to rise at the same rate.
After that factor prices would be bid up and profits would fall. As inflation continues accounting become meaningless and more of the profits would be taken as taxes which should be re-invested merely to maintain capital.
“Inflation thus can never be more than a temporary fillip, and even this beneficial effect can only last as long as somebody continues to be cheated and expectations of some unnecessarily disappointed,” Hayek said.
“Its stimulus is due to errors it produces. It is particularly dangerous because its harmful after effects of even small does of inflation can be staved off only by larger doses of inflation.
“Once it has continued for some time, even the prevention of further acceleration of inflation will create a situation in which it will be very difficult to avoid a spontaneous deflation.
The masses who are ‘cheated’ by the effect of inflation then react against governments which also become increasingly interventionist.
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In the US, there is widespread public unhappiness under ample reserves, while asset prices are up and homelessness is also elevated.
Government finances are also under pressure after years of stimulus and rising expenditure including interest rates.
US President Donald Trump, elected amid the general unhappiness which has discredited liberal rule, has also called for rates cuts and has engaged in sweeping state intervention in trade and other areas giving big shocks to the economy.
“There are two points which cannot be stressed enough: first, it seems certain that we shall not stop the drift toward more and more state control unless we stop the inflationary trend,: Hayek said.
“..[A]nd, second, any continued rise in prices is dangerous because, once we begin to rely on its stimulating effect, we shall be committed to a course that will leave, us no choice but that between more inflation, on the one hand, and paying for our mistake by a recession or depression, on the other,”
“Even a very moderate degree of inflation is dangerous because it ties the hands of those responsible for policy by creating a situation in which, every time a problem arises, a little more inflation seems the only easy way out…..
“Those who wish to preserve freedom should recognize, however, that inflation is probably the most important single factor in that vicious circle wherein one kind of government action makes more and more government control necessary.
“For this reason, all those who wish to stop the drift toward increasing government control should concentrate their efforts on monetary policy.”
Trump called for rate cuts in part to reduce the Federal interest bill.
Despite the Fed switching its agency securities into government securities, US Treasuries yields have not fallen unlike in the past amid lower demand including from foreign central banks for American bonds.
Thought the Fed reduced rates by 25 basis points long term bond yields fell around 1 to 2 basis points, reports said.
The full FOMC statement is reproduced below:
Federal Reserve issues FOMC statement
In support of its goals and in light of the shift in the balance of risks, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 3-1/2 to 3‑3/4 percent. In considering the extent and timing of additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.
In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.
The Committee judges that reserve balances have declined to ample levels and will initiate purchases of shorter-term Treasury securities as needed to maintain an ample supply of reserves on an ongoing basis.
Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Michael S. Barr; Michelle W. Bowman; Susan M. Collins; Lisa D. Cook; Philip N. Jefferson; Alberto G. Musalem; and Christopher J. Waller. Voting against this action were Stephen I. Miran, who preferred to lower the target range for the federal funds rate by 1/2 percentage point at this meeting; and Austan D. Goolsbee and Jeffrey R. Schmid, who preferred no change to the target range for the federal funds rate at this meeting.
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