Did the Federal Reserve alter its course of action?
In the economic landscape of 2025, the Federal Reserve finds itself at a crossroads, grappling with the potential for inflation while navigating calls for economic stimulus.
The Trump administration has urged the Fed to take action to boost the economy, a sentiment echoed by financial analysts who predict two more rate reductions in 2025 and one further reduction in early 2026. This comes as the money necessary for economic growth is already available within the banking system, although its current use may require improvement to effectively combat potential inflation.
The excess reserves in the commercial banking system still surpass $3.0 trillion, and the U.S. banking system has excessive cash balances, potentially overwhelming the Federal Reserve system in terms of a growing money stock. The M2 money stock, a measure of the total amount of money in circulation, is still growing at a rate exceeding 7.0% for the past two years, indicating a potential future rise in inflation.
This rapid growth of the M2 money stock has caused concern for Chairman Powell and the Federal Reserve Board. In response, the Fed reduced its policy rate of interest on September 17, 2025, from 4.25% to 4.00%. The change in the Fed's securities portfolio could be considered consistent with this drop in the Fed's target range for the Federal Funds rate.
Ending the period of "quantitative tightening" could be consistent with the predicted future rate reductions. The Fed may have stopped reducing the size of the securities portfolio if it were going to begin to drop the effective Federal Funds rate. The primary policy tool of the Federal Open Market Committee is the size of the Fed's portfolio of securities held outright, and the Federal Reserve's securities portfolio has modestly risen for a three-week period starting September 3, 2025.
With Powell's term as Chair nearing an end, the concern over potential inflation should receive more attention. As the economy is expected to continue growing, albeit at a modest pace, the Fed must strike a delicate balance between stimulating growth and controlling inflation.
Meanwhile, the European Central Bank (ECB) has maintained its monetary policy, with the Bundesbank keeping the three key ECB interest rates unchanged since the end of the last banking weekend on September 17, 2025, maintaining inflation close to the medium-term target of 2%.
In this complex economic environment, the Federal Reserve's decisions will play a crucial role in shaping the economic future of the United States.
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