The dollar suddenly increased after favorable news for America'sThe Fed has raised interest rates 11 times since March 2022, but inflation remains well above target and U.S. central bank officials are taking more aggressive action than in the past. This is thought to be due to a lack of monetary policy adjustment.
When Federal Reserve officials say their long-term inflation target is 2%, they are referring to the percentage growth in the Core Personal Consumption Expenditures Price Index (Core PCE) compared to the same period last year.
The more popular and often cited inflation figure is the year-over-year growth rate of the Consumer Price Index (CPI).
In fact, from May 2023 to the present, the six-month Treasury yield has been consistently above 5.3% and even above 5.5%. Additionally, approximately $1 trillion has been withdrawn from the reverse repo facility since May.
In other words, the U.S. federal government is pumping trillions of dollars previously siphoned out of the financial system by the Fed back into the economy through bonds with attractive yields.
The higher the yield, the more money flows into the financial system. This is one of the strange phenomena in the fight against inflation. The clearest evidence is that M2 money supply fell to a two-year low in April 2023, then stopped declining and even increased slightly in the following four months. Without a reduction in the money supply, it will be difficult to reduce inflation. The Fed tried to tighten monetary policy by raising interest rates and withdrawing money, while the U.S. government increased debt and injected more money into the economy to cover budget deficits. No matter how strong your hands are, you cannot clap loudly. No matter how hard the Fed tries, it will be difficult to control inflation if monetary policy runs counter to monetary policy.
