Does the Federal Reserve know what it’s doing?

Published by the R Street Institute.

The attached policy study was published in Cato Journal,  Vol. 36, No. 2.

The Federal Reserve is the most financially dangerous institution in the world. It represents tremendous systemic risk—more systemic financial and economic risk than anybody else. Fed actions designed to manipulate the world’s dominant fiat currency, based on the debatable theories and guesses of a committee of economists, can create runaway consumer price and asset inflation, force negative real returns on people’s savings, reduce real wages, stoke disastrous financial bubbles that lead to financial collapses, distort markets and resource allocation, and in general create financial instability. The Fed has done or is doing all of these things—ironically enough—in the name of pursuing stability. But whatever its intentions, does the Fed actually know what it is doing? Clearly, it hasn’t in the past, and it is exceptionally dubious in principle that it ever can. Since that is true, how can anybody think the Fed should be an independent power?