Fed’s Policies Contradict Each Other

My colleague Seth Bailey and I have this letter in today’s Financial Times:

Sir, Henry Kaufman frets that “libertarian dogma led the Fed astray” (April 28). Congress, not free-market ideology, is the real culprit.One reason is mission creep. The Fed’s original job was to keep inflation low by keeping the money supply in check. That’s it. The Humphrey-Hawkins Act of 1978 expanded that mission to include keeping unemployment low.

Low-inflation monetary policy and low-unemployment monetary policy contradict each other. If the Fed keeps inflation low, then it cannot lower unemployment rates through an artificial inflation-induced boom. If the Fed wants to lower unemployment, it must forgo low inflation. Worse, since a bust always follows an inflationary boom, business cycles become more volatile.

The results speak for themselves. The Fed can control inflation – if left free from political interference. But it cannot also accomplish its other missions, especially through the un-libertarian means of manipulating price levels. Where is the libertarianism?

Ryan Young and Seth Bailey,
Research Associates,
Competitive Enterprise Institute,
Washington, DC, US