The Federal Reserve Isn’t What Pundits Want It To Be, And Never Was

Facade of the Marriner S Eccles building of the United States Federal Reserve, on a bright and sunny day in Washington, DC, United States, July 24, 2017. (Photo by Smith Collection/Gado/Getty Images)

Getty Images

The Fed’s mandates are rooted in endless fallacy, most prominently the discredited Phillips Curve which says economic growth causes prices to rise. Please keep this in mind as monetary policy grandees pen high-toned pieces musing about what the next Fed Chairman should think about, and do.

All it takes to see the foolishness of everything central-bank related is to contemplate the Fed’s “price stability” mandate. While thinking about it, perhaps Google “I, Pencil” to see the myriad global inputs that go into the making of something so prosaic.

Having done that, stop and think about other market goods like Boeing planes, GM cars, and Apple iPhones. Considering planes alone, the recently mothballed 747 was a consequence of six million different parts manufactured around the world. Rest assured that GM cars aren’t much different, after which iPhones can claim inputs from six different continents.

Think seriously about all this as economists spend endless time musing about who should take over for Jerome Powell. Oh, the conceit! They desire a focus on “price stability,” and they think deeply about whether “the Fed should modify its 2% inflation interpretation” (John Cochrane) without acknowledging what’s true: price stability is not only undesirable, it’s a mandate that the Fed could never fulfill in the first place.

Starting with the undesirable part, it is prices that organize the market economy. That they bounce all around is a feature of the organization as price movements tell producers what to produce more or less of. The movements up and down are evidence of neither inflation nor deflation when it’s remembered that a rising price signals fewer dollars for other purchases, and a falling price signals more. Price movements by their very name balance each other.

As for the Fed’s role in prices, whether stable or unstable, the mere discussion isn’t serious. Exactly because market goods are an effect of remarkably sophisticated global cooperation among billions of hands and machines, the idea that Jerome Powell, his lieutenants, and hundreds of egghead economists under them could engineer “price” anything is too silly for words.

To which some will say that the Fed isn’t fiddling with prices when it attempts to meddle in the workings of the economy, rather the Fed is trying to manage credit flows through interest rates lest the U.S. economy become too strong and “overheat,” thus leading to rising prices. Yes, the discredited Phillips Curve.

Back to reality, economies aren’t machines, rather they’re individuals. And individuals don’t overheat as much as their innovations attract copious amounts of capital without regard to what the Fed does. Matched with the capital, the innovators find all manner of ways to produce more for less, on the way to falling prices. Yes, the surest sign of economic growth is falling prices.

Which is just a comment that “price stability” is just a variation of Phillips Curve orthodoxy. And it’s bogus. As for “price stability” from the Fed having to do with dollar price stability, that’s not part of the Fed’s policy portfolio and it never has been.

Cochrane observes that “The Financial and monetary system have evolved past the current Fed,” which is true, but it’s 112 years true, not a 2025 thing. Cochrane thinks “a wise Fed chair will need answers” to his many questions, but the happier truth is that the Fed isn’t what Cochrane wants it to be, and thankfully never was. Evidence? The booming U.S. economy.