The Federal Open Market Committee voted unanimously yesterday to raise its target range a quarter point to between 3.75 and 4 percent. It is the first increase since July 2023, and it follows five straight meetings this year at which the committee met. Updated projections put the median target at 4.1 percent by year-end, with 16 of 18 participants expecting one more increase before then.

The move is easy enough to defend. Twelve-month CPI inflation stood at 3.4 percent in August, well above the 2 percent goal, and prices have run above that goal for five and a half years. Unemployment held at 4.1 percent, and both the rate and the level of unemployment have changed little over the past year. When inflation runs above target and the labor market nears full employment, both prongs of the Fed’s dual mandate point the same way: raise the target rate and tighten conditions.

The trouble is that both prongs pointed that way more strongly in the spring. Twelve-month inflation reached 3.8 percent in April and 4.2 percent in May, the highest reading since April 2023. Unemployment over those months was no lower than it is today. Inflation was higher, employment was no weaker, and the committee held at every meeting. Nothing the Fed has published explains why 4.2 percent inflation called for patience while 3.4 percent calls for tightening.

Read the rest of this post →

I recently had a letter to the editor published by the Wall Street Journal in support of Donald Luskin’s op-ed calling for an end to forward guidance—the practice by which central bankers try to use their public statements and forecasts to guide markets and consumers.

In the letter, I augment Luskin’s arguments with two recent and concrete examples of the failures of forward guidance.

Last September, rising inflation warranted holding the target range or a small increase. The Fed’s forward guidance communications had already signaled a rate cut and, not wanting to spook markets, the FOMC followed through with the cut despite prevailing data.

Read the rest of this post →

September 11 marks one of the darkest days in US history. Terrorists murdered thousands of people on American soil, put countless people in fear for their safety, and left a scar in American history that can still be felt to this day. Yet what is less known is the financial surveillance that was expanded in the wake of the attack.

The Bank Secrecy Act already required banks and other financial institutions to report their customers to the government, but Congress decided that it wanted more. In the near blink of an eye, the USA PATRIOT Act was signed into law. At the time, the Cato Institute’s Robert A. Levy wrote that the law “zipped through in six weeks—gutting much of the Fourth Amendment in far less time than Congress typically expends on routine bills that raise no constitutional concerns.”

The damage to civil liberties caused by the PATRIOT Act is far-reaching. For just financial surveillance, the law mandated stricter customer identification (better known as know your customer, or KYC, requirements), expanded the list of financial institutions that must surveil customers, scrutinized foreign relations, created channels for more government officials to access this surveillance system, and made much of the system confidential from the broader public.

The Treasury Department has learned nothing from markets’ muted reactions to its bond price engineering schemes. Having doubled its long-end buybacks in August to at least $4 billion per operation, this week the Treasury unveiled a $6 billion operation in the 10- to 20-year sector, triple the normal size. Instead of lowering bond yields, as it was supposed to, the 10-year yield climbed to 4.85 percent, a three-year high, and the 30-year yield pushed back above 5.3 percent.

I wrote last month that unless the root causes of high yields are addressed, many of which originate in Washington, no amount of government financial engineering would help. Bond price manipulation cannot persuade markets to stop pricing government debt for excessive spending and inflation risks stemming from failed macroeconomic policies such as tariffs and the war in Iran. 

And that’s what happened again, only faster than before. In August, yields dipped for at least a day before recovering. This time they rose straight through Treasury Secretary Scott Bessent’s announcement. Around $6 billion per operation is no better than $4 billion when weighed against a $31.5 trillion Treasury market, and the market is no longer pretending otherwise.

This week, the Treasury Department, under Secretary Scott Bessent, announced it would at least double the size of its long-end buyback operations, lifting the ceiling from $2 billion to at least $4 billion per operation. This decision was in response to a further climb in the 30-year yield to its highest level since 2007. Yields initially dipped on the news—as the Treasury would have hoped—but then markets erased nearly the entire drop within a day.

To run a buyback, the Treasury purchases longer-dated Treasury bonds and funds the purchases by issuing short-term Treasury bills, swapping long-term government debt for short-term government debt, and removing the long-term bonds from private hands. 

The Bank Secrecy Act doesn’t just violate our freedoms; it also crushes small businesses. 

The Trump administration expanded financial surveillance last year by decreasing the reporting thresholds for currency transaction reports from $10,000 to just $200. After public pushback and a legal challenge by the Institute for Justice, the threshold was raised to $1,000. 

Yet, the damage was done. Evangelina Ornelas told The Guardian that her business was already destroyed. Ornelas runs a small, family-owned grocery store that used to have long lines of customers waiting for their money services (e.g., check cashing and remittances). Those lines have dried up, however, due to privacy concerns under the new surveillance.

Much has changed for crypto in Washington since the current Trump administration took office. The enforcement campaign against the major exchanges has wound down; rulemaking has begun to replace litigation as the instrument of policy; and Congress has at last supplied rules for stablecoins. What has not changed is that market structure remains unfinished business, so most improvements rest on the goodwill of regulators rather than on the force of law. The Senate has never come closer to finishing the job than it has this year.

Market structure is the shorthand for a market’s basic legal architecture, meaning the rules that settle which body of law governs a given instrument and who supervises the firms that trade it. Supplying one for crypto is the bulk of what the Digital Asset Market Clarity Act would do. The bill would fix what a digital asset is in the eyes of the law and whether it is subject to the jurisdiction of the Securities and Exchange Commission (SEC) or the Commodity Futures Trading Commission (CFTC). This matters because a security carries registration and disclosure duties that a commodity does not.