{"id":130,"date":"2025-06-11T15:58:54","date_gmt":"2025-06-11T19:58:54","guid":{"rendered":"https:\/\/people.bsu.edu\/econbriefs\/?p=130"},"modified":"2025-06-11T15:58:54","modified_gmt":"2025-06-11T19:58:54","slug":"inflation-and-the-fed-why-the-last-mile-is-the-hardest-by-dr-cecil-bohanon-and-dr-john-horowitz","status":"publish","type":"post","link":"https:\/\/people.bsu.edu\/econbriefs\/2025\/06\/11\/inflation-and-the-fed-why-the-last-mile-is-the-hardest-by-dr-cecil-bohanon-and-dr-john-horowitz\/","title":{"rendered":"Inflation and the Fed: Why the Last Mile Is the Hardest \u2013 by Dr. Cecil Bohanon and Dr. John Horowitz"},"content":{"rendered":"<p><em>Originally written on 5\/21\/2024<\/em><\/p>\n<p><span data-contrast=\"auto\">Milton Friedman famously said, <\/span><a href=\"https:\/\/www.hoover.org\/research\/inflation-true-and-false\"><span data-contrast=\"none\">\u201cInflation is always and everywhere a monetary phenomenon.<\/span><\/a><span data-contrast=\"none\">\u201d <\/span><span data-contrast=\"auto\">The intuition behind this observation is quite simple and goes back, at least, to the 18<\/span><span data-contrast=\"auto\">th<\/span><span data-contrast=\"auto\"> century. Suppose the amount of money that all consumers, businesses, and other economic actors held were to magically double overnight. It would only be a matter of time before prices started rising, and under certain conditions, the price level also would double. However, how long will it take for people to feel the full effects of this monetary expansion? Weeks? Months? Years? No one knows.\u00a0<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559740&quot;:480}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">The Federal Reserve expands the money supply by buying assets like U.S. government bonds. When the Fed buys U.S. bonds, the banks gain new reserves, which they loan out, creating more money. Conversely, the Fed contracts the money supply by selling its assets.<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559731&quot;:720,&quot;335559740&quot;:480}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">In 2008, the Federal Reserve changed how it managed the nation\u2019s money supply. They moved from targeting the growth of the money supply to targeting the effective Federal Funds rates coupled with the Fed paying interest on the reserves banks held at the Fed. The consequences of these policy changes <\/span><a href=\"https:\/\/www.wsj.com\/articles\/quantitative-tightening-becomes-a-trap-for-the-fed-inflation-reserve-requirements-powell-5c8cd332?mod=Searchresults_pos8&amp;page=1\"><span data-contrast=\"none\">led to a ballooning of bank reserves, from the low tens of billions before 2008 to $3.4 trillion at the latest count<\/span><\/a><span data-contrast=\"auto\">. The Fed made the change to forestall a national banking crisis by insuring bank liquidity. However, this massive increase in bank reserves did not initially cause inflation as the bank held on to those reserves.<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559731&quot;:720,&quot;335559740&quot;:480}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">As a result of distributing COVID-19 relief funds to pretty much everybody, spending rose, eventually triggering inflation. To slow inflation down, the Fed raised the Fed Funds rate, which has reduced inflation but not to the target inflation rate of 2% to which the Fed is committed.\u00a0<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559731&quot;:720,&quot;335559740&quot;:480}\">\u00a0<\/span><\/p>\n<p><span data-contrast=\"auto\">So what should the Fed do? We believe the Fed should stay the course until indicators confirm inflation has cooled to 2%. What will the Fed do? We don\u2019t know, but we can read the tea leaves from our favorite inflation expectation measure: the yield difference between indexed and <\/span><a href=\"https:\/\/fred.stlouisfed.org\/series\/T5YIE\"><span data-contrast=\"none\">unindexed five-year government bonds<\/span><\/a><span data-contrast=\"auto\">. On October 16<\/span><span data-contrast=\"auto\">th<\/span><span data-contrast=\"auto\">, this measure stood at 2.52%. By December 6<\/span><span data-contrast=\"auto\">th<\/span><span data-contrast=\"auto\">, it had fallen to 2.05%, which indicated we might be out of the woods. Unfortunately, it rose back to 2.52% by April 16<\/span><span data-contrast=\"auto\">th<\/span><span data-contrast=\"auto\">. Over the last month, it has declined but is at a stubbornly high rate of 2.32%. It seems the last MILE is always the hardest.<\/span><span data-ccp-props=\"{&quot;201341983&quot;:0,&quot;335559731&quot;:720,&quot;335559740&quot;:480}\">\u00a0<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Originally written on 5\/21\/2024 Milton Friedman famously said, \u201cInflation is always and everywhere a monetary phenomenon.\u201d The intuition behind this observation is quite simple and goes back, at least, to the 18th century. Suppose the amount of money that all consumers, businesses, and other economic actors held were to magically double overnight. It would only [&hellip;]<\/p>\n","protected":false},"author":112,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[8],"tags":[1250,1249,1252,1248,4,7,1251,94,106,347,114,348],"class_list":["post-130","post","type-post","status-publish","format-standard","hentry","category-inflation","tag-bank-reserves","tag-bond-yields","tag-central-banking","tag-covid-relief","tag-federal-reserve","tag-inflation","tag-inflation-expectations","tag-interest-rates","tag-macroeconomics","tag-milton-friedman","tag-monetary-policy","tag-money-supply"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.7 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Inflation and the Fed: Why the Last Mile Is the Hardest \u2013 by Dr. Cecil Bohanon and Dr. John Horowitz - Econ Briefs<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/people.bsu.edu\/econbriefs\/2025\/06\/11\/inflation-and-the-fed-why-the-last-mile-is-the-hardest-by-dr-cecil-bohanon-and-dr-john-horowitz\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Inflation and the Fed: Why the Last Mile Is the Hardest \u2013 by Dr. Cecil Bohanon and Dr. John Horowitz - Econ Briefs\" \/>\n<meta property=\"og:description\" content=\"Originally written on 5\/21\/2024 Milton Friedman famously said, \u201cInflation is always and everywhere a monetary phenomenon.\u201d The intuition behind this observation is quite simple and goes back, at least, to the 18th century. 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