Economics: What´s To Like About Yesterday`s Fed Hike?

 (Drivebycuriosity) -  Yesterday the Federal Reserve hiked her interest rate by 0.75 percent points to fight inflation. I would have preferred a raise of 1 percent point at least to get the red hot inflation faster under control and to reduce the need of further large hikes. But Wall Street liked the decision apparently. The interest sensitive Nasdaq gained 2.6%, most of the gains came after the proclamation. 

 

What´s To Like About Yesterday`s Fed Hike? The raise was very modest given an inflation rate of almost 9%. The real interest rate - nominal minus inflation rate - is still deeply negative and historical very low. Yesterday the Fed showed the will to fight inflation without forcing a recession.

The Fed does not have an direct influence on inflation. Generally low Fed rates encourage the banks to give loans and high rates discourage them. When the loans land on the accounts of the bank customers they become money: M1 includes money in circulation plus checkable deposits in banks. M2 includes M1 plus savings deposits (less than $100,000) and money market mutual funds. M3 includes M2 plus large time deposits in banks.

Yesterday`s hike gives the banks a bit less initiative to create loans which should slow the growth of money supply, the engine of the inflation, modestly. In the past when the Fed fight against inflation a recession followed (cato. ), there`s hope that the Fed could avoid this fate this time.