The Federal Reserve has become increasingly concerned with “awakening” issues such as inequality and climate change. These concerns have diverted Fed officials from their core goal of price stability. The Fed’s preferred inflation reached 6.59 percent in March. If the Fed achieves its 2-percent target during the epidemic, price levels are now 4.6 percentage points higher. With inflation at its highest level in 40 years, it’s time to re-examine the Fed’s legitimate responsibilities.
As for monetary policy, a central bank has one and only one legitimate obligation: to maintain price stability through transparent activities consistent with the rule of law.
Inconsistent action with long-term price stability reduces overall well-being. They also open the door to divert resources at the expense of the common people. It is a road to economic inefficiency, arbitrary redistribution of wealth, politicization of monetary policy and chaos.
The best service the Fed can provide is simply to follow a stable, transparent, and predictable financial structure. The Fed can achieve this by making money at a rate that stabilizes overall spending. Such a policy benefits all members of society. This creates lower and more stable inflation, which allows families and businesses to plan more efficiently so that economic activity is better coordinated. And it fades the business cycle, requiring the Fed to offset personal spending changes to maintain price stability.
Historically, the Fed’s pursuit of goals other than price stability has led to massive fiscal deficits. In search of higher labor employment, the Fed made money very quickly in the 1970s, leading to great inflation. A similar pursuit led the Fed to adopt an average inflation target for 2020. After keeping inflation below their 2-percent target for most of 2014-2020, the Fed has decided to keep inflation above 2 percent for an undisclosed period, reducing unemployment and reducing income inequality. This deliberate attempt by the Fed to increase inflation has led to epidemic-related government spending programs and negative supply disruptions. The result of high inflation.
Even more so is the interest in pursuing the current Fed’s “inclusive” monetary policy, which seeks to advance the interests of particular “stakeholders” in society. This opens the Pandora’s box. The list of potential stakeholder groups to target is endless, and there is no objective way to resolve conflicts between them and between them.
Some progressives have called on the Fed to fund a new green deal, while some conservatives want the Fed to finance the construction of a border wall. Opening monetary policy on such issues has politicized the Fed and threatened its independence. Fiscal policies, with a clear political agenda, are inherently divisive, not inclusive. And it is wrong to assume that a political power, once granted, will only be used for wisdom and good.
The Fed is a misguided organization that is used to pursue income equality stakeholder goals. It is the role of elected officials and tax and transfer arrangements. The Fed’s monetary policy instruments broadly affect macroeconomic variables, such as interest rates and inflation, and are therefore poorly suited for pursuing the interests of particular stakeholders.
Yet the commitment to income equality has prompted the Fed to pursue a policy of extremely low interest rates. However, these policies have contributed to the current plight of our inflation. To bring inflation back, the Fed is now trying to change positions and raise interest rates quickly. This will weaken the economy, which has already shrunk in the first quarter of 2022. It is not surprising that forecasters are predicting a high probability of a recession
If a recession is implemented, it will inadvertently cause minimal damage to health. In times of recession, workers with minimal experience and education are the first to be laid off. This dramatically increases the unemployment rate for low-income groups such as students and minorities. These Americans would be better off if the Fed focused on price stability rather than trying to stimulate the economy to their advantage. The employment order is unnecessary, because a central bank that follows price stability can already do the most to stabilize employment. Yet employment orders have been a source of unnecessary confusion. The interests of all Americans would be better served if the Fed’s charter was amended by Congress to provide a single order for price stability. The obvious limitations in this single order will help keep the Fed from falling asleep on inflation again.