WHAT IS THE PURPOSE OF THE FED?

WHAT IS THE PURPOSE OF THE FED? by Robert Aro for Mises

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With all the history, lore and media spotlight the Federal Reserve receives, how many people stopped to ask: What is the Fed’s purpose?

According to their website’s FAQs, the Federal Reserve system exists to:

provide the nation with a safer, more flexible, and more stable monetary and financial system.

It aims to carry this out through free market intervention including:

influencing money and credit conditions in the economy in pursuit of full employment and stable prices.

While the method of operations may leave some questioning the efficacy of its ability to reach its goals, it’s still much different than what San Francisco Fed president Mary Daly told the Wall Street Journal, in a one-on-one interview on Thursday:

If you go back to our forefathers, in 1913 they created the Federal Reserve and created clear roles. The Federal Reserve’s job is to use the short-term interest rate and its asset-buying capabilities to stimulate the economy, accommodate and stimulate the economy, through the interest-rate channel, making it cheaper for households and businesses to buy and sell goods.

The problem with “stimulate the economy” is that it signifies very little, as all platitudes do. How much stimulation does an economy need? And whether they may over- or understimulate can hardly be articulated. Concluding the Fed makes goods cheaper is an untenable position to hold considering they seek to fight deflation. What is possible to explain are interest rates and asset buying. Once understood, the redundancy of the Fed is exposed.

The first tool is interest rates, in which there is either an ideal rate or not. If the position of an “ideal rate” is believed, the question to follow is: How is this calculated? With over a hundred years of experience, we still have yet to find a verifiable method. No one can prove why a 0.25 percent rate is preferred to 0 or 0.50 percent.

If there is no ideal interest rate, we must come to terms with understanding that the Fed has no business in setting benchmark rates for an entire nation, if not the entire world.

The second key tool is the “asset-buying capabilities,” the act of money creation for the purpose of buying real assets. This is an act that, if done by anyone except the Fed, would lead to lengthy prison sentences.

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