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Fed’s policies contradict each other

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Fed’s policies contradict each other

Letter to the Editor in The Financial Times

Sir, Henry Kaufman frets that “libertarian dogma led the Fed astray”
(April 28). Congress, not free-market ideology, is the real culprit.

One
reason is mission creep. The Fed’s original job was to keep inflation
low by keeping the money supply in check. That’s it. The
Humphrey-Hawkins Act of 1978 expanded that mission to include keeping
unemployment low.

Low-inflation monetary policy and
low-unemployment monetary policy contradict each other. If the Fed
keeps inflation low, then it cannot lower unemployment rates through an
artificial inflation-induced boom. If the Fed wants to lower
unemployment, it must forgo low inflation. Worse, since a bust always
follows an inflationary boom, business cycles become more volatile.

The
results speak for themselves. The Fed can control inflation – if left
free from political interference. But it cannot also accomplish its
other missions, especially through the un-libertarian means of
manipulating price levels. Where is the libertarianism?