The Fed Should Get More Precise, Like My KitchenAid Mixer

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The chart above doesn't go all the way back, but since 1990, the Fed Funds Rate has moved in quarter-percent increments only. 

This is a big deal because the Federal Reserve meets next week and there is a bevy of discussion among market players about whether the Fed should raise the Fed Funds Rate by 0.250% to fight inflation, or hold the FFR steady to support ailing banks. 

Pundits are split between the two scenarios:

• Some think a quarter-percent hike would devastate the economy
• Some think a quarter-percent hike would heal the economy

There is a third option, though, and it exists somewhere in between the two. 

Instead of moving in 25 basis point increments, the Federal Reserve could get more specific.  Increase the Fed Funds Rate by something like 8 basis points.  A precise adjustment like that could yield a precise impact on the economy.

Here's another way to look at it:

If a quarter-percent rate hike could trigger bank problems, and no increase could trigger inflation problems, why not shoot for somewhere in the middle?

Here's my best take at an analogy.

I like to bake and when I want to get precise with batter, I leave my hand-held mixer in the drawer because it only has two speeds -- Low and High.  Instead, I reach for my KitchenAid Tilt-Head Stand Mixer that has 10 different speed settings.

I use my KitchenAid because I want precision; there's a huge difference in peanut butter cookies when they're mixed at Speed 3 versus Speed 7.

At Speed 3, the batter churns slowly and the dough stays thick and soft. 

At Speed 7, quick spinning injects all sorts of air into the batter and the cookies end up with this weird, "airy" texture.

So, even with 10 speeds, it turns out that there is only one "right" one for peanut butter cookies.

So, then we have the Fed. 

The Fed has an infinite number of speed settings at its disposal, but it chooses to use just 3 of them: Off, Low, or High.  In Fed Terms, we call these speeds "Pause", "25 basis points", and "50 basis points", respectively. 

3 speeds is more suited for things like chopping broccoli than for making policy decisions for the Fed Funds Rate.  It's one reason why the Fed is often the Fool in the Shower.

So, as inflation pressures find new life in unexpected places, the Fed has an unusually tough vote coming up next week.  In its press release, it will undoubtedly address inflationary pressures head-on but what will it do with the Fed Funds Rate. 

No matter what, expect speculation about that decision -- did the Federal Reserve did too much, or did it do too little?  A case can be made either way. 

But, then again, maybe the answer lies somewhere between the two.  Like, say, 0.08%.