The Fed Remains Undeterred by White House Polemics

As expected, the US Federal Reserve announced its latest decision to raise the target range for the federal funds rate to 2.25–2.50 per cent. The move marked the fourth increase this year. Professor Friedrich Heinemann, head of the “Corporate Taxation and Public Finance” Research Department at the Mannheim Centre for European Economic Research (ZEW), offers his view.

“It is only right that the Fed stays on course to bring monetary policy back to normal while remaining undeterred by White House polemics or weakening economic data. The systematic exit from a crisis-era monetary policy is also reflected in the fact that the Fed is steadily shrinking the assets on its balance sheet, which has already been reduced by eight per cent compared to last year’s level.

By holding on to their policy, the Fed is making an important contribution to increasing the resilience of the US economy, thus putting it in a better position to weather future crises. In contrast to the European Central Bank, the Fed has regained considerable room to manoeuvre in terms of interest rate policy when facing the next economic downturn. Besides, the gradual wind down of the balance sheet is a signal to Congress that it must not rely on perpetual monetary financing of budget deficits. It would be highly desirable if the ECB sent out similarly clear signals to budgetary policymakers in Europe.”