Fed Rate Cuts Will Only Lead to More Inflation

Government intervention, not a lack of monetary supply, impedes growth.

On October 29, the US Federal Reserve (Fed) lowered its benchmark interest rate (Federal Funds Rate) by 25 basis points, setting it between 3.75% and 4%. This decision follows a similar rate cut made in September. Notably, these decisions were made while inflation continued to rise, and remained much above the Fed’s long-term target of 2%.

Given these factors, the Fed should not have cut federal funds rate, but raised them. Let’s explain.

The Fed’s interest rate is the main tool for managing the monetary supply. When the rate increases, the supply of money in circulation decreases; when the rate decreases, the supply increases.

As Nobel Laureate Milton Friedman stated, “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” In this sense, lowering the federal funds rate will lead to an increase in the monetary supply, which will result, inevitably, in higher inflation.

Throughout 2025, inflation in the US, as measured by both the Consumer Price Index (CPI) and the Personal Consumption Expenditures Price Index (PCE), has remained above the Fed’s target. The PCE is important because it is the indicator used by the Fed to set its inflation target.

The CPI rose from 2.3% in April to 3.0% in September, while the PCE increased from 2.3% to an estimated 2.8% over the same period. With this in mind, economists from the Monetarist School like Milton Friedman would argue that raising interest rates would have been a more appropriate response to persistent inflation.

Some policymakers and commentators, including President Donald Trump, have advocated lower interest rates, believing that increasing the monetary supply can stimulate economic growth and reduce unemployment. However, economic theory and historical evidence suggest that expanding the monetary supply only leads, in the long run, to higher inflation, not greater economic growth.

On the contrary, evidence shows that inflation, even low, discourages economic growth and job creation.

We must end the myth that printing money stimulates economic growth and reduces unemployment. If printing money fosters economic growth, why bother working, investing and innovating? In this sense, one of the biggest mistakes in US legislation is the Federal Reserve Reform Act of 1977 where it gave the “dual mandate” to the Fed:

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long-run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

Since the only consequence of a more rapid increase in the quantity of money can be inflation, and not output or more employment, the Federal Reserve Act should be reformed to say:

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long-run growth of the monetary aggregates commensurate with stable prices defined as zero variation in the Consumer Price Index in the long run.

The biggest obstacle to economic growth is excessive government intervention, not a lack of monetary supply. To foster economic growth, the prescription should be more economic freedom: lower taxes, reduced public spending, deregulation to allow greater competition and let markets do their job, ending the Fed, and slashing and eliminating all tariffs to promote free trade. Cutting the Fed’s fund rates will only increase inflation.

While the Federal Reserve currently targets a long-term inflation rate of 2%, some economists, including Thomas Hoenig, former president of the Federal Reserve Bank of Kansas City, argue that the ideal central bank target should be zero.

Even low inflation distorts price signals, misleading entrepreneurs about true scarcities and consumer preferences. This misalignment hampers economic calculation, reduces potential growth, and ultimately increases unemployment. In other words, any inflation, even minimal, impedes growth—it does not foster it.

Setting a long-term inflation target of zero is crucial for sound economic policy.

Ultimately, the best option would be to end central banking and allow the free supply and demand of money. There is nothing in economics that justifies the existence of central banking. As Nobel Laureate Friedrich Hayek said in Denationalisation of Money:

There is no answer in the available literature to the question why a government monopoly of the provision of money [central banking] is universally regarded as indispensable… It has the defects of all monopolies: and one must use its product even if it is unsatisfactory.

Courtesy of FEE.org

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