- AMERICAN INSTITUTE FOR ECONOMIC RESEARCH - Nicholas Curott & James McClure - MAY 22, 2022 -
The Federal Reserve has become increasingly concerned with “woke” issues like inequality and climate change. These concerns have distracted Fed officials from their core mission of price stability. The Fed’s preferred measure of inflation hit 6.59 percent in March. The price level is now 4.6 percentage points higher than it would have been had the Fed hit its 2-percent target over the course of the pandemic. With inflation raging at the highest rate in 40 years, it is time to reexamine the Fed’s legitimate responsibilities.
Regarding monetary policy, a central bank has one—and only one— legitimate obligation: to maintain price stability via transparent activities that conform to the rule of law.
Actions inconsistent with long-run price stability reduce overall welfare. They also open the door for wealth to be diverted to special interests at the expense of the general public. This is the road to economic inefficiency, arbitrary wealth redistributions, politicization of monetary policy, and chaos.
The best service the Fed can provide is to singularly pursue a stable, transparent, and predictable monetary framework. The Fed can achieve this by creating money at a rate that stabilizes overall spending. Such a policy benefits all members of society. It creates low and steady inflation, which allows households and businesses to plan more effectively so that economic activities are better coordinated. And it dampens business cycles by requiring the Fed to offset changes in private spending to maintain price stability.
Historically, the Fed’s pursuit of goals other than price stability has led to a great deal of monetary malfeasance. In pursuit of higher labor employment, the Fed created money too rapidly in the 1970s, causing the Great Inflation. Similar pursuits led the Fed to adopt an average inflation target in 2020. After letting inflation fall below their 2-percent target for most of the period from 2014 to 2020, the Fed decided to let inflation run over 2 percent for an undisclosed period in hopes of lowering unemployment and reducing income inequality. This deliberate attempt by the Fed to raise inflation has accommodated pandemic-related government spending programs and negative supply disruptions. High inflation is the result.
Even more concerning is the current Fed’s expressed interest in pursuing “inclusive” monetary policies, which attempt to advance the interests of particular “stakeholders” in society. This opens Pandora’s box. The list of potential stakeholder groups to target is limitless, and there is no objective way to resolve conflicts between and among them.
Some progressives have called for the Fed to finance a Green New Deal, while some conservatives want the Fed to finance construction of a border wall. Opening monetary policy to such issues inherently politicizes the Fed and threatens its independence. Monetary policies with explicitly political agendas are inherently divisive, not inclusive. And it is a mistake to assume that a political power, once granted, will only be used by the wise and for the good.
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