The Federal Reserve’s Fatal Conceit

What is the appropriate role of the Federal Reserve in America’s free-market economy? I ask because the Fed appears to be standing in judgment of the economic growth agenda being pursued by President Trump — acting purposely to stymy its goals by imposing restrictive interest rates. Is it the central bank’s responsibility to counter the policy initiatives of the nation’s chief executive when it disagrees with them?Fed officials are quick to claim the moral high ground in defending their actions by invoking the central bank’s exalted mandate to promote “stable prices” and “maximum employment.” The Fed’s definition of stable prices, though, has long been reconfigured to mean that our nation’s monetary integrity will be steadily eroded through central bank decisions that continually reduce the purchasing power of every American dollar. Plus, the Fed’s dedication to maximum employment is belied by its efforts to restrict access to credit for America’s small businesses, where most jobs are created. It would seem that the Fed’s most successful role has been to serve as the financier of expanding government — especially since the debacle of the 2008 global financial meltdown. Through major interventions into credit markets and multiple large-scale purchases of government-backed financial assets, the Fed has become the largest single holder of America’s national debt. Despite assurances from monetary officials that they are committed to shrinking the Fed’s balance sheet, the Congressional Budget Office estimates that the Fed will more than double its holdings of Treasury debt over the next 10 years.So is that the true purpose of our national bank — to channel financial resources to the government? Intended or not, when interest rates are deliberately kept higher than market forces would bring about through supply and demand, lendable capital flows to government at the expense of the private sector. Deficit spending gets financed, while productive investment to expand the output of goods and services is thwarted by the high cost of borrowing.Of course, the government also has to incur the higher cost of financing its accumulating debt — but those interest payments come out of taxpayer receipts, no matter the cost. The Treasury pays whatever interest rate is demanded by investors to procure the necessary funds to cover government spending authorized by Congress. The increased future outlays to make interest payments on the national debt are simply tacked on to CBO budgetary projections. Meanwhile, private sector borrowers are left to bear the burden of the Fed’s smug intellectualism. Monetary officials have been unanimous since the inauguration of Mr. Trump in asserting that keeping their policy interest rate at an artificially high level to be “moderately restrictive” is a superior policy to targeting the “neutral” rate — which is the theoretical interest rate that neither stimulates nor restricts economic growth. In other words, they choose to impose the Fed’s managed rate rather than allow the real interest rate to be determined through market forces. No one on the Fed’s Board of Governors has yet dissented from voting for this approach.The message is that the discretionary judgment of the 12 voting members of the Fed’s monetary policymaking committee should prevail over the collective wisdom of the millions of individuals who actually participate in the real economy — producers and consumers, borrowers and lenders — who generate the nation’s economic output and whose access to capital determines their ability to provide the goods and services that increase prosperity.This fatal conceit mindset has been prominently on display these past two days as Chairman Jerome Powell has spent hours testifying before Congress in accordance with a requirement that the Fed report semi-annually on its monetary policy decisions. The practice of holding the Fed accountable to Congress and to the public through these hearings originated under the Full Employment and Balanced Growth Act of 1978 — better known as the Humphrey-Hawkins Act.In conjunction with the Federal Reserve Reform Act of 1977, the Humphrey-Hawkins Act played a major legislative role in stipulating the responsibilities of our nation’s central bank. Specifically, it directed the Fed to pursue a list of stated economic objectives — including the “achievement of an improved trade balance” and ensuring the “ability of our economy to compete successfully in international markets” — to improve our nation’s prospects in the interests of the American people.Contrary to assertions that Fed independence means our nation’s central bank should be unconcerned about other policy initiatives that are part of an administration’s economic agenda, the 1978 law seeks to harness monetary policy in a synchronized effort to achieve the full list of economic goals. The need for “better integration” of economic policymaking within the federal government to achieve national objectives is emphasized throughout the Act, which states:“Attainment of these objectives should be facilitated by setting explicit short-term and medium-term economic goals, and by improved coordination among the President, the Congress, and the Board of Governors of the Federal Reserve System.”In short, the Fed’s attitude of shunning any notion of coordination — instead resorting to calculated insubordination — is decidedly out of synch with the directive handed down through its legacy legislation. The Humphrey-Hawkins Act was designed to ensure that monetary policy officials work hand-in-hand with Congress and the president to achieve national economic priorities, notably stating “with maximum reliance on the resources and ingenuity of the private sector of the economy.” Amen.

The Federal Reserve’s Fatal Conceit

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