Has the federal reserve run out of bullets? That implication could be drawn from the recently released minutes of the Fed's last Open Market Committee meeting, during which the federal funds rate was cut from 2.25% to 2%. The Fed hinted that no more rate cuts are in store and that the economic horizon is becoming cloudier. (The reason our central bank can't reduce interest rates further is that the inflation picture is getting uglier.) Stocks tanked on this news. However, the Fed has yet to use its most effective artillery: strengthening the value of the U.S. dollar. While denying it, the Federal Reserve is still in thrall to the Phillips curve. This posits that there is a tradeoff between economic growth and inflation: that to gin up an economy a central bank must print more money (which eventually leads to more inflation), and that to bring inflation down a central bank must tighten money (which slows down the economy). Experience has demonstrated time and again that the Phillips curve is b.s. Economies can achieve nonin-flationary prosperity.
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