Luddy: The Fed's Risky Uncharted Course
The Federal Reserve Bank, also known as “The Fed,” was created in 1913 to regulate the banks and to ensure a stable dollar.
The Fed has strayed from its initial charter and is now the primary enabler of federal deficit spending and debt, which is now almost $20 trillion. The Fed’s primary tool is low interest rates, which distort financial decisions and expand the money supply, which leads to risky economic choices.
The Fed has created an additional intervention — purchasing debt instruments. These purchases have expanded the Fed’s balance sheet to almost $4 trillion, a major market distortion. Some economists justify these interventions as necessary during times of crisis but, in the long run, Fed actions lead to inflation and massive federal debt, which will, if not corrected, lead to another financial crisis.
Ultra-low interest rates allow the federal government to borrow at will without having to pay market interest rates. If rates begin to rise, interest cost for the government will dramatically increase the yearly deficit.
The Fed decided some years back to create inflation of at least 2%. Inflation causes two major harms. The first is wage earners lose buying power as prices inflate. The second is that the government is able to repay debt with inflated dollars, which means that bondholders also lose because of the deflated value of the dollar.
The Fed’s creation of 2% inflation is an outrage and grossly unfair to wage earners, as noted in my TAS article in February 2016. It gets worse. We now have a proposal to inflate the currency to 4%, a suggestion by Olivier Blanchard, a Peterson Institute economist. This idea was initially ignored, but the Wall Street Journal reported last week that it “is getting new life.” The Fed is considering this idea because it provides another monetary tool to manipulate the money supply and interest rates.