To say we live in unprecedented times has become downright tiresome. So, I won’t say it.
I know of no institution for which we are all somewhat accustomed, but for which there is so much confusion, as the Federal Reserve.
Here is what they don’t do. They don’t print money. The Treasury does that. But, the Treasury does not create money. Only the Fed can do that.
Since the Treasury cannot create money, it can’t be used to bail out excess federal government spending. Misguided central banks elsewhere do just that, but not in our country. Instead, our nation had the wisdom, or the inherent mistrust in our own political process, to create an independent Federal Reserve that is not prone to political opportunism.
TOO MUCH, TOO LITTLE
The Fed’s job is to maintain the value and integrity of our monetary system, and use their various tools to create the environment for private sector success. They moderate the expansion of the money supply to curb inflation, and they set their discount rate to encourage the banking system to extend just the right amount of credit to the private sector. Too much credit creates labor shortages and induces inflation. Too little credit holds back the economy, but can also moderate runaway inflation.
‘THE FED DOES NOT’
Their actions to set the growth of the money supply and encourage or discourage banks’ extension of credit are not the only economic variables they influence. In doing their work responsibly, they in turn influence the exchange rate, the interest rates important to us all, and the economic growth rate. When the Fed does its thing, it takes into account these secondary effects. But they never take their eyes off the true prize.
Notice the other political dimensions we’ve not mentioned.
The Fed does not try to influence our negotiations with China, or our terms of trade with Europe. It does not pull out its powerful tools to ensure one political party or another prevails.
The Fed is the economic equivalent to the Supreme Court. It follows a higher calling than political expediency. Its constitution is sound economic policy. At its best, it completely ignores political pressure. At its worst, it still manages to substantially resist such meddling.
And I am glad for it.
MOSTLY GETS IT RIGHT
We live in a political world, one that has become increasingly politicized and divisive. Even divisions on the Supreme Court seem to be predictable along party lines. Perhaps it is a credit or a curse of the economics discipline that such political schisms don’t exist. Economists share much more in common than suffer the differences of fashionable dogma.
Now, I don’t always agree with the Fed, just as I don’t always believe the Supreme Court got it right. I thought the Fed acted too slowly in 2008, and didn’t do enough in 2009. That armchair economic quarterbacking is not critical of wholesale economic error, but only one of expediency and degree. The Fed mostly gets it right most all of the time.
They lower the discount rate to encourage banks to lend out their reserves when greater investment is necessary to spur a faltering economy. And they crank up the discount rate to twist banks’ arms to keep more of their cash with the Fed rather than extend additional credit when the economy is already overheated.
LEVELING THE FIELD
After a particularly difficult bout of high inflation, high interest rates, and high unemployment back in the early 1980s, the Fed has become incredibly adept at striking this balance remarkably well.
In fact, but for some most unusual times from time to time, the Fed can be credited with the creation of an incredibly level playing field. Moderate growth and moderated inflation no know political preference. They are timeless values from which we all benefit over time.
IN OUR BEST INTEREST
I applaud the Fed’s adherence to reasonable monetary policy. Their mission is not broadly appreciated, and their methods are somewhat opaque to most citizens. It requires some investment in economics, and some thought to connect myriad dots, but we should all be grateful for their diligence. I’m sure each governor who sits on the Fed has their own political philosophies and preferences. And, I’m equally sure that they invariably act in our collective best interests regardless.
Colin Read teaches finance and economics at SUNY Plattsburgh and has published a dozen books on local and global finance and economics. He is also mayor of the City of Plattsburgh. He can be reached at firstname.lastname@example.org.