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Everyone loves to dunk on the Federal Reserve (Fed). To many, the setters of U.S. monetary policy never get it right. Its stable of Ph.D. economists are always too late, or too slow, or too early, or too fast. Shockingly, many have built prominent careers in peddling this viewpoint. Yet, few realize that the Fed’s errors stem from a poorly constructed view of money that is widely shared, even by its critics. This perspective leads to absurd conclusions like the Fed must destroy demand in order to combat today’s rising prices. Wait, what?!
You heard that right. In fact, you might even be nodding in agreement. The Fed wants to harm the economy to combat today’s rising prices. Its solution for pain is more pain. It’s for our own good, of course.
Well, so, as I mentioned, you can see places where the demand is substantially in excess of supply. And what you’re seeing as a result of that is prices going up and at unsustainable levels, levels that are not consistent with 2 percent inflation. And so what our tools do is that as we raise interest rates, demand moderates: it moves down. … I mean, so, yes, there may be some pain associated with getting back to that.
Jerome Powell, FOMC Press Conference, May 4, 2022
This flawed (and morally repugnant) line of thinking unfortunately dominates macroeconomic discussions today. How: 1) adjusting a single interest rate solely available to commercial banks on a monthly basis predictably impacts the entire country’s economic activity, and; 2) it’s morally proper for the Fed to destroy (certain) people’s lives, is so readily accepted is problematic. Identifying the dangers of such conclusions requires a different view of money; one that
