Dallas Fed President Lorie Logan recently proposed ditching the federal funds rate target as the Fed’s main policy tool. Her proposal would ensure that the Fed can continue to effectively implement monetary policy, but it fails to address one of the main flaws of the post-2008 monetary system.

The Fed’s Operating Target

In order to explore the merits of Logan’s argument, it helps to consider the context of what the Fed tries to do and how it tries to do it. The Fed’s job is to achieve maximum employment and price stability. To do that, it influences borrowing costs across the economy. Everything from mortgage rates to credit card APRs is affected by Fed policy. But it can’t set those rates directly. Instead, it tosses a small pebble into the financial pond—a change in its operating target—and counts on ripples through the financial system to spread outward towards its macroeconomic objectives.

Throughout its history, the Fed has used different pebbles to start those ripples: the quantity of bank reserves, the money supply, and, since the mid-1990s, the federal funds rate – the overnight rate on money that banks lend to each other.

Before 2008, targeting the federal funds rate worked smoothly. The Fed hit its target by adjusting the supply of money in the banking system. When banks were short on money, they would look to make up the shortfall in the federal funds market. Reducing the federal funds rate target made it cheaper for banks to obtain funds, which allowed them to pass lower rates on via their own lending. The ripples eventually reached households and businesses through cheaper loans and easier credit, stimulating spending and investment.

At the moment, adjusting the federal funds rate still produces the Fed’s desired ripple effect. But Logan is raising the alarm: it might be time to reach for a new pebble.

A Fragile Link

Before the Global Financial Crisis, the federal funds market was vibrant. Banks with excess reserves lent to those with shortfalls. The interest rate on those overnight loans is what we call the federal funds rate. 

The financial landscape changed dramatically after the crisis. The Fed flooded the banking system with money through quantitative easing and began paying banks interest on the funds held on deposit at the Fed. Suddenly, money in the banking system was no longer scarce, and banks had little need to borrow from one another. With trillions of dollars now sloshing through the system, both borrowers and lenders largely disappeared.

The market didn’t vanish entirely. A few players, most notably the Federal Home Loan Banks (FHLBs), continue lending because they cannot earn interest on their balances at the Fed. On the demand side, foreign bank branches in the US stepped in to exploit small arbitrage opportunities between the federal funds rate and the Fed’s interest on reserves.

That narrow participation keeps the market alive, but only barely. It now sees about $100 billion in daily volume, compared to trillions of dollars in secured repo markets. As Logan warns, with so few participants, the connection between the federal funds rate and broader money markets is fragile. If the FHLBs were to pull back—say, during a crisis like the Silicon Valley Bank episode in 2023—the market could dry up.

And, if that happens, the Fed could toss its pebble into the pond…and find that no ripples follow.

A New Pebble?

What should replace the federal funds rate? Logan argues that the Fed should consider targeting a Treasury repo rate, such as the tri-party general collateral rate (TGCR).

Repo markets are where borrowers obtain short-term funding by pledging high-quality assets, like Treasury securities, as collateral. Logan describes a number of advantages in moving to a Treasury repo rate target. The most obvious is the size and breadth of the market. TGCR transactions account for more than $1 trillion in daily volume across a broad set of financial institutions. This makes it unlikely to be affected by the behavior of individual institutions, which stands in sharp contrast to the influence of the FHLBs in the federal funds market.

There is also a strong link to other money markets. Since TGCR represents the marginal cost of funds for a meaningful segment of the financial system, changes to it will almost certainly pass through to other short-term interest rates. This again stands in contrast to the federal funds rate, which primarily results from the arbitrage activities of a small number of foreign banks. The possibility of throwing a TGCR pebble and not getting the desired ripple effect is slim.

Notably, the Fed is already trying to influence repo markets by encouraging use of its Standing Repo Facility (SRF). The SRF is designed to keep market repo rates – like the TGCR – in sync with the federal funds rate. Financial institutions appear hesitant to use the SRF. Targeting TGCR directly would be a more straightforward path to achieving the Fed’s goals. 

From Pond to Pool

Logan’s proposal addresses a legitimate concern – the fragility of the federal funds rate – but it doubles down on a bigger problem with the post-2008 monetary system: the financial pond has been transformed into a Fed-controlled pool.

Prior to 2008, the contours of the financial pond were largely determined by market forces. The Fed would toss its pebble in, and the desired ripples would be produced by its interaction with the supply and demand for money in the banking system. In other words, the Fed could control the federal funds rate, but it had to account for existing market conditions to achieve its target range.

After 2008, the Fed massively increased the amount of money in the banking system, to the point where banks no longer borrow and lend to each other. Under this system, the federal funds rate ceases to be a market-clearing price reflecting supply and demand – instead, it becomes a fixed price arbitrarily set by Fed decision makers. The price signals that result from banks trading funds with one another are suppressed, and the Fed becomes the dominant supplier of short-term funding. The financial pond is transformed into a pool requiring the Fed’s regular maintenance.

Logan advocates keeping the current system – that is, keeping a large supply of money in the banking system – even after moving to a repo operating target. This is where her proposal runs into trouble. Maintaining the Fed’s outsized role in the financial system weakens market mechanisms that help to allocate credit efficiently and discipline bank risk-taking. It also raises political concerns: the more interaction the Fed has with the financial system, the greater scope it has for influencing credit allocation and picking “winners” and “losers”.  

In contrast to Logan’s proposal, two other Fed officials – Governor Michelle Bowman and Kansas City Fed President Jeffrey Schmid – have recently advocated shrinking the Fed’s role in the financial system. In a November 13 speech, Schmid noted this could “promote a more efficient allocation of liquidity, an allocation influenced by price signals and market forces.” 

Treasury Secretary Scott Bessent has made similar critiques of the Fed’s current framework.   

Conclusion

Reducing the Fed’s role in the financial system – letting the pool evolve back into a pond, with market forces directing the ebb-and-flow – would be a step in the right direction. This evolution will take time, though. 

Logan’s proposal has the virtue of highlighting that the link between the federal funds rate and the broader financial system may break down before that evolution is complete. A well-rounded reform should address both issues – finding an effective, new pebble while also facilitating the evolution back towards a pond.  

Inflation was lower than expected in November, the Bureau of Labor Statistics (BLS) reported yesterday, in the first official inflation release since October following the extended government shutdown earlier this fall. Over the two months from September to November, the consumer price index (CPI) rose 0.2 percent, down from a 0.3 percent increase in September alone. On a year-over-year basis, headline inflation edged down to 2.7 percent in November from 3.0 percent in September.

Core inflation, which excludes food and energy prices, also rose 0.2 percent over the two-month period, unchanged from September. Core inflation, measured year-over-year, eased to 2.6 percent in November from 3.0 percent in September.

Energy prices were the main driver of inflation over the period, rising 1.1 percent. Food prices also increased modestly, up 0.1 percent, along with prices for household furnishings and operations, communication, and personal care. By contrast, prices for lodging away from home, recreation, and apparel declined.

Tariffs continue to put upward pressure on prices, but their effect appears to be easing, consistent with Federal Reserve Chair Powell’s view that tariffs are likely to result in a one-time increase in the price level. Combining September’s 0.3 percent increase with the modest rise in prices over October and November implies inflation is running at roughly a two-percent annual rate late in the period, though the absence of October data warrants caution.

Recent core CPI data tell a similar story. Core prices rose 0.2 percent in September and increased just 0.2 percent over the two months from September to November, implying a slower pace late in the period.

Taken together, these readings mark a notable shift from the late-summer pattern. In the July–September data, inflation was running at roughly a 0.3 percent monthly pace — equivalent to an annual rate near 3.7 percent — well above what the year-over-year figures suggested at the time. The most recent readings, by contrast, indicate a materially slower pace of price increases, with both headline and core inflation now running much closer to the Fed’s two-percent target, though again, the lack of October data complicates this assessment.

Although the Federal Reserve officially targets the personal consumption expenditures price index (PCEPI), CPI data remain a timely and relevant gauge for policymakers. The two measures generally track one another closely, though CPI tends to run somewhat higher than PCE inflation. As a result, the latest CPI readings provide a useful — if slightly overstated — signal of the inflation environment facing Fed officials as they assess the stance of policy.

Although the recent data suggest that inflation may be easing, the BLS relied on certain methodological assumptions when calculating the November CPI to account for the missing October data. Some analysts have raised concerns that those assumptions may have temporarily biased measured inflation downward. If that is the case, the apparent slowdown in inflation may be due to measurement error rather than a genuine change in the underlying momentum.

Still, financial markets appear to be interpreting the data favorably. Major stock indices rose and bond yields fell following the release. While the CME Group’s FedWatch tool suggests that markets expect the Federal Reserve to hold rates steady at its next meeting, the relative likelihood of a rate cut ticked up modestly after the November CPI report. That shift is consistent with the view that inflation is moving closer to target and lends support to Chair Powell’s recent claim that monetary policy is close to neutral.

Despite the uncertainty surrounding the data, the November CPI report is welcome news on the inflation front. After remaining stubbornly elevated for several years, inflation now seems to be moving back toward target. Even so, upcoming releases of the personal consumption expenditures price index and next month’s CPI should clarify whether the apparent cooling reflects a genuine slowdown in price increases or a temporary measurement distortion.

The title of Dan Wang’s book Breakneck focuses on the People’s Republic of China (PRC) specifically, but it is really about the self-conscious great-power rivalry between China’s Communist Party leaders and the United States. Along the way, we encounter all the popular points of controversy between the two great nations, covering everything from bullet trains, iPhone factories, and Trump tariffs to zero-COVID lockdowns, rare-earth mineral supply chains, and the demographic long tail of the One Child policy.

This isn’t just another case of two big nations clashing—as big nations tend to do from time to time. For finance analyst and university research fellow Dan Wang, the US and the PRC are uniquely paired in world affairs. In his introduction, he writes, “…no two peoples are more alike than Americans and Chinese,” citing their shared love of consumerism, pragmatic natures, and appreciation for technological progress.

Wang sees the US and PRC economies, in particular, as complements, which explains the rapid growth of trade between the two in the twenty-first century: “It is almost uncanny how much the United States and China have been complementary of each other.”

Yet at the same time, he says that, on a political level, “the two systems are a study in contrasts.” Fair enough, as they’re obviously very different. Yet in other passages, he frames the US and PRC systems as “inversions” of each other. This is seen in each society’s attitudes toward innovation and technology adoption, and to politics in general. It would take a sublime Confucian scholar to disentangle these contradictions. Perhaps the two nations are the phoenix and the dragon of world politics, the cobra and the mongoose, or simply each other’s evil twin.

Focusing on differences, Wang describes a Chinese government run by relentlessly practical but unsentimental engineers, who excel at building impressive infrastructure projects yet often disregard the negative impact on individual citizens. By contrast, America—the home of legal proceduralism and bureaucracy—has, in recent decades, erected a bewildering array of roadblocks to major projects, but does a much better job of recognizing and safeguarding individual rights.

This summary of strengths and weaknesses naturally suggests that each nation could benefit from borrowing elements of the other. The Chinese would be better off in certain ways by becoming more American, and vice versa. The first nation to adopt its counterpart’s advantages, Wang argues, will—like a comic book villain or mythic hero—bring balance to the force of good governance and “win” the twenty-first century.

It’s a reassuring prescription in a way, implying that there are no fundamental conflicts between the two nations that can’t be resolved through better understanding. Yet it contrasts sharply with the rhetoric coming out of both Beijing and Washington, D.C., where policy hawks from each country frame a twenty-first-century showdown that many fear could lead to war in the Taiwan Strait or elsewhere.

It also recalls the attitudes of some Western academics and center-left pundits during the Cold War, who assumed that the US and Soviet systems were similarly paired and would eventually converge in ways beneficial to both societies.

As late as 1988, for example, famed Affluent Society author John Kenneth Galbraith co-published a book with Marxist economist Stanislav Menshikov that imagined a future of increased trade and cooperation between the US and the USSR. They also, as Publisher’s Weekly put it at the time, “…criticize[d] establishment interests on both sides that seek to perpetuate the cold war.”

Galbraith and Menshikov were right that the Cold War would soon end—but not in a way that left the Soviets with a 50 percent stake in the world’s political future. If the collapse of the Soviet system—at a time when some Western economists were still predicting that the Warsaw Pact countries were on track to surpass the West economically—arrived so unexpectedly, one wonders what yet-unseen surprises the Chinese Communist Party has in store for the twenty-first century.

The Party, after all, has delivered plenty of dramatic—and mostly unpleasant—shocks to its own people over the decades. Wang takes deep dives into two of the most infamous: the One Child policy and the zero-COVID containment strategy. The former was certainly more horrific, although the latter’s impacts are far more recent and the responsibility of the current government, giving the pandemic lockdowns more resonance for younger Chinese citizens.

The PRC’s One Child policy was enforced, in successive iterations, from 1980 to 2015, and as a two- and three-child policy until 2021. The statistics, as Wang recounts them, are grim. In 1983, for example, the government sterilized 16 million women and aborted 14 million babies. Women who tried to resist were pressured, harassed, and sometimes even kidnapped by enforcement squads. Official propaganda claimed the procedures were voluntary, but in reality, they were the result of well-organized coercion: “…women [were] hauled before mass rallies and harangued into consenting to an abortion.”

Unsurprisingly, the policy was extremely unpopular among the women and families subjected to it, and the regime did little to blunt the pain it inflicted. “It didn’t help,” Wang dryly notes, “that the abortion posses literally carted off women in hog cages.”

The PRC’s COVID containment strategy was similarly authoritarian. Despite officials praising themselves for initially managing the pandemic well, by early 2022, rising infections were creating growing anxiety among Politburo members in Beijing. The government eventually imposed some of the largest forced quarantines in modern history, confining most of Shanghai’s population, for example, to their homes from March onward.

The lockdown lasted roughly five months—in a metro area of 25 million people, three times the size of New York City. Officials failed to ensure that residents could maintain reliable access to food and clean water. Chaos and panic were widespread, with many forced to adopt digital hunting and gathering as a full-time strategy to supplement the unpredictable and insufficient official provisions.

Wang quotes the unexpectedly poetic—and horrifying—propaganda broadcast throughout the city via drones: “Please comply with COVID restrictions. Control your soul’s desire for freedom,” the floating loudspeakers intoned.

Compared with scenes like that, the 3,000-page environmental impact statements and NIMBYism of US lawyerly society hardly seem so bad. Certainly, if most Americans had to choose between enduring the persistent defects of the United States and living under a system designed by the Chinese Communist Party, they would almost certainly opt for slow trains and the Bill of Rights.

Also, as Wang describes in a chapter on dissatisfied PRC expats, plenty of Chinese nationals with the money and initiative to leave have done so. Some of them, in line with popular narratives, have come to the US to get STEM doctorates and apply for H1B engineering jobs, but plenty have also become beach bums in Thailand or slam poets, democracy activists, and bookshop proprietors in global outposts.

Ultimately, Wang’s equal-but-opposite framework shows the limits of its evenhandedness. While understandably not wanting to depict his family’s home country as evil and vicious, it is difficult to “both sides” the human rights atrocities of something like the One Child policy. Are fast trains and tall bridges as admirable a civilizational achievement as respect for freedom of speech, religion, and the press? Should we pretend that the PRC could have had all of the former if they had brought themselves to embrace the latter?

More prosaically, the “each should be more like the other” framing muddies the question when it comes to issues like housing affordability and supply, which Breakneck repeatedly identifies as a problem in the US today. Wang argues that US institutions of government haven’t built enough.

“American cities have broadly failed to build adequate housing or infrastructure,” he writes. But in a market economy with robust property rights, it is not the government’s job to build housing—that’s what D.R. Horton, Pulte Homes, hundreds of smaller companies, and thousands of work crews are for. The problem is that major American cities have made it nearly impossible for the private sector to actually do its job.

Our problem is not, as many industrial policy proponents claim, a “lack of state capacity,” but precisely the opposite. We have empowered governmental institutions far beyond their constitutional limits with too much capacity for spending, debt, obstruction, and veto. We are being strangled and impoverished by the state capacity we have now. Making San Francisco and New York more like the land of ghost cities and abandoned theme parks will not be an improvement. Does anyone really believe that the most indebted nation in the history of the world is being chiefly held back because its government agencies aren’t able to borrow even more money and saddle future taxpayers with even more debt?

Granted, Wang generally does an admirable job of holding Americans’ feet to the fire with respect to our own problems around productivity and growth, which are significant. We would, after all, not want to end up like the CCP itself, which is notoriously bad at processing bad news and dealing with dissent, leading to consequences ranging from farcical to nightmarish.

We also wouldn’t want our industrial strength to decline so far that we end up like Europe, which Wang dismisses as a “mausoleum economy.” Americans, both as citizens and policymakers, will need to step up to compete with the machinations of the Communist mandarins in Beijing. We should, however, be careful not to copy their worst policies along the way.

On most days, America’s air traffic control system is invisible. The radar screens flicker, the controllers thread needles as planes approach and depart, and millions of passengers move through the sky supported by a grid they never see. We are reminded of its fragility only when something breaks.

The most recent federal government shutdown provided just such a reminder. The system strained not because of storms or technological failure, but because Washington stopped paying its bills. Controllers continued working without pay, modernization projects halted, safety inspectors were furloughed, and as a result, flights were canceled. This was an institutional failure. If the skies darken whenever Congress deadlocks, the problem is not aviation, but governance.

The United States funds air traffic control (ATC) through the Airport and Airway Trust Fund, fed by ticket and fuel taxes that are, in principle, user fees. That mechanism should supply financial stability. But before they can be spent, those revenues must be appropriated by Congress. When Congress fails to act, the Trust Fund’s faucet dries up, and the system grinds to a halt. A national utility that controls a $6 trillion economy’s daily commerce becomes hostage to whatever unrelated issues are holding up the budget process.

The shutdown revealed something deeper than the usual political dysfunction: it suggests we’ve been using the wrong model entirely. Air traffic control is a safety-critical operation that should be financed continuously and governed predictably. Instead, America has fused operations, safety oversight, labor policies, and salaries into a single agency whose revenues can be cut off at the very moment they are most needed.

The remedy begins with a principle the country once understood instinctively: transportation infrastructure works best when those who use it fund it. The “user pays” principle is simple and elegant. Those who benefit directly from a service finance its operation and upkeep, ensuring that costs and benefits are internalized, that funding remains reliable, and that investment aligns with need rather than politics. This is not some neoliberal scheme to extract money from users, nor is it a novel idea—it’s how British turnpike trusts operated in Adam Smith’s era.

The local parishes, which had been charged with maintaining the King’s highways, could not or would not do so effectively. Parliament, therefore, authorized trusts to levy tolls and dedicate proceeds entirely to road repair. Smith defended this arrangement against those who preferred outright nationalization, pointing out how directly appropriate “tonnage” tolls were to the maintenance of wear and tear caused by the ton weights of wagons.

The same principle underpinned the early canal and port companies of the nineteenth century. Barges, shipowners, and traders paid for access, and revenues financed dredging, lock gates, and quay improvements. For decades, this was considered utterly normal. Infrastructure was an investment supported by the commerce that depended upon it. Nobel Laureate Ronald Coase pointed out how even the lighthouse system, an early precursor of ATC, often regarded as a classic example of a public good, was funded by user fees in England.

F.A. Hayek would have recognized this as part of a broader constitutional logic. The state need not build or operate infrastructure directly; its role is to define predictable and impartial rules for access and pricing. A network governed by clear rules and direct payment is far more stable than one funded at the whim of legislators. Rules, not appropriations, preserve steady service.

The same logic applies today to roads and highways. For most of the twentieth century, the gas tax approximated a user fee: heavier or more frequent drivers paid more into the system than lighter or occasional ones. The problem is that this mechanism is eroding. Vehicles are more fuel-efficient, and increasing numbers of electric vehicles contribute little or nothing. Highways’ needs remain while revenues atrophy. A direct user-based charge—such as a vehicle-miles-traveled or weight-distance formula—restores cost precision and allows infrastructure finance to track actual use.

It is therefore unsurprising that modern aviation already embodies user-pays. Airlines and passengers finance ATC through direct charges in nearly every advanced jurisdiction, because airspace management resembles a network utility: it requires constant capital renewal, highly trained operators, and continuous technological upgrades. The economic logic is the same as the turnpike: the party that benefits should fund the service.

In the United States, however, this sensible principle has been attached to a brittle institutional structure. User revenue flows into a trust fund, but it is filtered through political appropriation, undermining insulation, predictability, and financial continuity. The shutdown did not merely suspend paychecks; it suspended America’s ability to modernize its own airspace. Complex systems cannot survive on short-term appropriations—they must plan continuously and invest regularly, or stagnate.

International experience is instructive. Britain and Canada both restructured their ATC systems during the 1990s. Both embraced user funding and recognized the need for capital modernization outside annual appropriations. Yet their structural choices diverged sharply.

The British model, NATS, is a regulated utility. It is nominally commercial, owned jointly by the government and a consortium of airlines, but its revenues, investment plans, and performance targets are controlled by the Civil Aviation Authority (CAA) through five-year regulatory cycles. Charges are set according to allowed revenue formulas, collected through EUROCONTROL, and periodically reviewed. The model provides transparency, enforces investment discipline, and ensures broad cost recovery from users. It is rule-based in the bureaucratic sense, with detailed performance targets and incentive structures.

Yet NATS has proven vulnerable to outside shocks. After 9/11, a sharp collapse in traffic revenue left NATS in severe financial trouble; the government had to step in with a loan. During COVID, traffic disappeared again, and the CAA allowed deferred cost recovery over a decade. The regulated model is stable under normal conditions but requires state liquidity and regulatory smoothing under stress. While it is rule-governed, it is not fully self-resilient.

The Canadian model, NAV CANADA, is more successful in this respect. Created in 1996 as a non-profit, non-share corporation, NAV CANADA is governed by its users: airlines, general aviation, employees, and public representatives. It cannot distribute profits and must reinvest surpluses or hold reserves. Revenue comes from direct user fees, with freedom to borrow for modernization. Crucially, safety regulation is separate. NAV CANADA operates the ATC system. Regulatory oversight is external and independent.

The results speak for themselves. NAV CANADA has weathered both 9/11 and COVID without taxpayer subsidy or shutdown. It has financed modernization internally, pioneered ADS-B satellite surveillance, and deployed remote tower technology. Operational priorities are driven by users who bear the costs directly; financing is continuous and project-driven rather than tied to appropriations. Accountability is internalized: the users who fund the system also help govern it.

Thus, the Canadian model embodies a more genuinely Hayekian rule structure than Britain’s. NATS operates within the modern British web of regulatory commands—price caps, performance metrics, and cost allowances. These are rules of administration rather than the rule of law. NAV CANADA, by contrast, functions under a few general, constitution-like constraints: it must recover its costs from users, consult stakeholders on rates, maintain safety standards, and refrain from distributing profit. Within that framework, local knowledge and operational judgment guide decisions. The structure limits discretion not by dictating outcomes but by securing responsibility.

Britain fell for the fatal conceit, trusting the regulator’s intelligence. Canada, by contrast, did the historically British thing: it trusted the rules of the game. In a national system operating in an international environment that demands constant reinvestment and rigorous safety discipline, the Canadian strategy has proven superior.

The US debate periodically revisits this question, and the shutdown has given it renewed urgency. The American ATC system is technologically capable, professionally run, and staffed by some of the world’s best controllers. Its weakness is governance: revenue collected at the point of use cannot be spent without Congressional consent, and the same agency that operates the system is also the safety regulator. That is a structural conflict: one side must prioritize continuous operations and efficiency; the other must enforce safety and compliance. Mixing the two guarantees that financial pressure becomes a safety problem, and vice versa. The tragic plane-helicopter collision at Reagan National earlier this year is an example.

The solution is surprisingly straightforward. Congress should legislate the separation of ATC operations from safety regulation, as recommended by Reason’s Bob Poole, and convert the operational system into an independent, non-profit ATC corporation modeled on NAV CANADA. This corporation would fund itself directly from user fees, reinvest surpluses, hold reserves, and be empowered to borrow for modernization. Safety regulation would remain a government agency function, where its independence could be fully exercised. The corporation would be insulated from revenue risk and political bargaining, but transparently accountable to its users through a stakeholder board.

The result would be safer skies because the rules are sharper. An external regulator can enforce safety standards without fear of conflicting priorities, while controllers and engineers can plan staffing, training, and technology on multi-decade horizons rather than budget cycles.

The political objection that “this is privatization”—with the implied accusation that it sells out the national interest to profit-seekers—misunderstands the point. NAV CANADA is not a private, for-profit enterprise. It is a public-interest, user-funded utility with no shareholders and no profit extraction. It has proven cheaper, safer, and more innovative precisely because it aligns control, cost, and accountability while insulating operations from political volatility, all within a framework of the rule of law.

The shutdown served as a warning: the American ATC system is too important to be turned off by legislative impasse. If one of the foundational rules of a free society is that those who use a service should pay for it, then the institutional flipside is that those who pay can keep it running. The classical liberal principle that served the turnpikes can serve the airways. And if we rebuild our transportation networks around users rather than appropriations, the only things left grounded in Washington will be Congressmen hiding in the cloakroom to avoid votes—not airplanes.

FLASHBACK:

December 2025 marks the official end of the largest cycle of quantitative tightening the Federal Reserve has ever undertaken.

From a peak of $8.93 trillion in June 2022, the Fed has allowed $2.4 trillion in maturing assets to roll off its balance sheet. But Chair Powell announced on December 10 that the Federal Open Market Committee (FOMC) has decided it must begin expanding its balance sheet again to maintain “ample reserves”—code for maximizing policy discretion and insulating itself from market forces.

Before the Global Financial Crisis (GFC), the Fed conducted monetary policy primarily through open market operations. Raising its target interest rate—the rate in the overnight interbank lending market—required the Fed to sell bonds from its balance sheet until the supply of reserves contracted enough to push up the federal funds rate (FFR). Conversely, lowering the target rate required purchasing bonds until reserves expanded sufficiently to pull the FFR down.

Another feature of this approach was that the Fed also “defended” its target against changes in market conditions. If demand for reserves (liquidity) increased in private markets, the Fed would respond by increasing the supply of reserves through additional bond purchases. In this framework, the Fed both engaged with and responded to private markets.

That changed after the GFC, when the Fed dramatically expanded its balance sheet, lowered its target rate to near zero, and began paying interest directly to banks on reserves held at the Fed. After 2008, interest rate targeting became largely a matter of adjusting the rates the Fed paid to banks and other counterparties, rather than buying or selling bonds in the open market.

This shift allowed the Fed to purchase bonds with relative impunity, since the interest rate it targeted was no longer directly constrained by reserve supply. The result was a series of bond-buying programs known as quantitative easing (QE). Several rounds of QE under former chair Ben Bernanke added trillions of dollars to the Fed’s balance sheet. By December 2019, the balance sheet stood at roughly $4.1 trillion, up from less than $1 trillion a decade earlier.

Under Chair Powell, however, the Fed added nearly $5 trillion more during and after the COVID-19 pandemic. The most recent round of belt-tightening was sorely needed, particularly given elevated inflation over the past four years. Even so, the current balance sheet—$6.539 trillion—is still $2.44 trillion larger (nearly 60 percent) than it was in December 2019. That amounts to an 8 percent annualized growth rate in the Fed’s balance sheet, compared with roughly 4 percent annualized inflation over the same period.

So $6.54 trillion is inadequate for “ample reserves”? Color me skeptical.

Yet the problems associated with monetary expansion remain. Prices are still rising at a 3 percent annual rate, well above the Fed’s stated 2 percent target. Other dynamics may therefore be influencing the Fed’s decision to restart QE while simultaneously lowering its target overnight rate.

The proposed $40 billion purchase in December will undo the last several months of tightening. Here is the pace at which the Fed’s quantitative tightening unfolded:

Still, there must be some explanation for the change in course. Perhaps, given the fracturing within the FOMC, we are witnessing a bit of old-fashioned horse trading.

President Trump has applied significant pressure on Powell and the FOMC to lower rates quickly. Powell and his colleagues have responded by reviving a form of monetary easing that does not require cutting the target federal funds rate. Reigniting QE appears to serve that purpose, allowing the Fed to ease policy while preserving at least a modicum of institutional self-respect rather than resorting to outright capitulation.

Powell also faces defections from both sides of the committee. Board member Stephen Miran favored a half-point cut, while Austan Goolsbee and Jeff Schmid voted to maintain the current target. (Somewhat ironically, three dissents played out in an almost identical fashion in September 2019, when James Bullard pushed for a half-point cut while Esther George and Eric Rosengren voted to hold the target rate steady.)

Given that the Fed pays banks and other counterparties the lower end of its target interest rate range, lowering the FFR reduces their interest bill. During the recent cycle of tightening and rate increases from 0.25 to 0.5 percent to over 5 percent, that interest bill ran into the hundreds of billions of dollars. Though the Fed can create all the dollars it needs to make payments, from an accounting standpoint, it garnered huge operating losses and even larger balance sheet losses during the recent cycle.

Restarting quantitative easing (the purchase of short-term Treasury debt) will ease the federal government’s borrowing costs. As interest rates on newly issued short-term Treasurys decline, the alarming rise in federal interest payments—now over a trillion dollars a year—may begin to level off.

The government’s insatiable appetite for borrowing may also bolster the FOMC’s claim that its balance sheet, though far larger than in 2019, remains less than “ample.” The Fed’s floor system—setting target interest rates independently of bond purchases—rests on the existence of a massive supply of reserves. That supply keeps the effective market rate for borrowing reserves below the “floor” rate the Fed pays on reserves. After all, why would a bank lend reserves to another bank at 2 percent when the Fed will pay 3.5 percent?

But rapid growth in the demand for reserves—effectively, demand for borrowing—driven by persistent federal deficits will exert upward pressure on interest rates, potentially pushing them above the Fed’s target.

I am not sure that would be so bad, just as I am not sure inflation modestly below the Fed’s 2 percent target would be so bad either. Yet with a voracious Treasury needing to borrow trillions more each year, the FOMC appears to believe it is time to expand the balance sheet through QE once again. Chair Powell may hope to thread the needle among competing views within the committee, but the Fed’s current course looks uncomfortably close to capitulation to political pressure. If inflation remains at or above 3 percent over the next year, we will have our answer.

Language matters. Words have not only technical meanings; they also summon particular attitudes and impressions. And sometimes these attitudes and impressions differ significantly from the words’ technical meanings. 

In no domain of economic policy is the confusion created by the divergence of words’ technical meanings from the attitudes and impressions conveyed by those words greater than in the domain of trade policy.

Trade Deficit

The most obvious, commonly used confusing term is “trade deficit.” “Deficit” inherently sounds bad. Everyone instinctively resists being in any kind of “deficit.” But those of us who understand the technical definition of “trade deficit” know that this “deficit” is merely the result of an accounting convention by which inflows into a country of money are counted as “positive” while outflows of money are counted as “negative.” 

Yet as many economists, including the Nobel laureate Vernon Smith, have pointed out, if the convention were instead (as it could be) to count as a positive the monetary value of imports – and as a negative the monetary value of exports – then so-called “trade deficits” would instead be “trade surpluses.”

The words “trade surpluses,” alas, are more difficult to demagogue than are the words “trade deficits.”

Concessions

Another technical term that conveys a misleading impression is “concessions,” which means agreements by governments to lower their trade barriers in exchange for other governments agreeing to lower their barriers. 

As the excellent trade-policy scholar Daniel Griswold summarizes, in trade agreements, “exports are a benefit and imports a ‘concession.’” The technical term “concession” is thus used to describe those instances in which governments allow their citizens to trade more freely. Greater freedom of trade and the additional goods and services that it makes available are bizarrely rendered as costs – as burdens – that the people of the home country endure in order to obtain the benefit of greater ease of exporting.

Dumping

Yet another term that distorts understanding is “dumping.” To accuse foreigners of “dumping” goods on our market is to suggest that foreigners are harming us by discarding their trash on our shores or otherwise burying us in things that we’d prefer not to have. No sane person wants to be dumped upon!

This suggestion is completely mistaken. The great trade economist Douglas Irwin notes that “the government’s definition of ‘dumping’ is a lower price charged in the United States than in a foreign exporter’s home market.” And so what really occurs with so-called “dumping” is that the people of the home country are offered the opportunity to buy particular goods at prices lower than foreigners must pay. If the practice of charging differentially lower prices in the US was called not “dumping” but “competitive pricing” or “bargain pricing,” perhaps domestic firms would have less success at persuading the government to use regulations against “dumping” to secure protection from vigorous foreign competition.

There is, after all, no economic reason why any particular good should sell in one country at a price identical to its price in another country. 

Plenty of factors explain why a particular model of automobile might sell for less in the US than in the producer’s home market. American demand for that model might simply be lower—perhaps because tastes differ, or because the US retail market is more competitive and offers more alternatives. It’s also possible that auto retailing in the US faces fewer costly government rules than abroad.

Whatever the reason, when imports sell here at lower prices than they do elsewhere, Americans benefit. These lower prices are a gain, not a problem to be “protected” from. Yet by labeling the practice of selling exports at differentially lower prices as “dumping,” policymakers create an unjustified bias against foreign competition.

‘Made in’ Labels

“Made in China” — or Canada, Malaysia, Namibia, or anywhere else — is now a misleading label. In today’s global economy, most goods and services are produced with ideas and inputs drawn from dozens of different countries. As I wrote in this space a few months ago,

In today’s global economy, the great majority of the manufactured goods that you consume consist of parts and ideas from around the world, including the US. A “Made in” label on some good tells you only where that good’s final assembly occurred. Bath towels at Target labeled “Made in Turkey” might well be made of cotton grown in Texas, dyed with pigments from Germany, woven on a loom made in India, and shipped to the US on a freighter made in Korea that is carrying a shipping container manufactured in Denmark. That label would be more accurate if it instead read “Final Processing Done in Turkey” — or, more accurate still, “Made on Earth.”

Americans Trade With

As a linguistic shorthand, we often describe countries as exporting, importing, and trading. 

“Germany exported $1.5 trillion of goods last year.” 

“Ireland is among the world’s leading suppliers of pharmaceutical products.” 

“America trades with China.” 

“The Netherlands ran a trade surplus.” 

We know what these sentences mean: Individuals — alone or in voluntary groups called firms — in one country engage in commerce with individuals in another. But the aggregate outcomes of all this commerce are then described in ways that imply each country itself engaged in these transactions, as if the results reflect a conscious collective choice made by its people.

Because all international commerce is carried out by individuals, and because each individual believes he or she is made better off by each transaction voluntarily conducted with foreigners, it’s difficult to see how the overall outcome could be negative. Mistakes aside — and there’s no reason to think Americans make more errors than non-Americans — every commercial exchange with a foreigner yields a gain for the American involved. The sum of these gains cannot plausibly be a negative number.

Yet it’s an easy, if careless, step from portraying trade as something done by large collective entities to concluding that these entities make choices contrary to the interests of their own people. “America,” for instance, is said to buy such large quantities of imports that most Americans supposedly suffer as a result. Somehow, “America” is acting against Americans. But once we recall that importing is done not by “America” but by individual Americans, the idea that we suffer net losses from importing becomes absurd.

It’s trite but true that language matters and can mislead. Nowhere in economic policy is this more evident than in trade.