Monetary policy entails an attempt to control the money supply (the amount of money in an economy) to achieve some predetermined economic outcome such as controlling inflation. Rather than allowing private markets to figure out how much money is needed, the U.S. relies on a central bank, the Federal Reserve, to determine what the correct money supply should be. Since the 1930s, the Fed has enjoyed a monopoly on the type of money issued in the U.S. instead of allowing competing currencies. The Fed uses its monopoly to plan the monetary sector of the economy, but it faces the same problems as any other central authority that tries to control economic activity. In particular, it is impossible for any planner to gather all of the information required to account for individual market participants’ wants, needs, and intentions, and the central authority faces no economic repercussions when it makes mistakes.
The Fed regularly manipulates the money supply in an attempt to promote both stable prices and high employment, but it is not accountable for failing to hit any specific economic targets. At its own discretion, the Fed buys Treasury securities in the open market to speed up the economy and sells them to slow down the economy. As the Fed enters its sixth consecutive year of aggressively trying to expand the economy, policymakers should start to question the effectiveness of its discretionary monetary policies. These distortionary policies, rather than expanding the economy, have harmed its long-term health.
By injecting so much money into the system through purchases of Treasury securities, the Fed has kept short-term interest rates lower than they otherwise would be. People who prefer traditionally safe investments, such as certificates of deposit (CDs), have suffered because CD rates have been artificially suppressed. Similarly, the Fed’s recent policies have almost surely caused some people to forgo saving and others to choose higher-return investments.
To the extent that people decided against saving, choosing instead to spend more or hold cash, future economic growth will be harmed because fewer funds will be available for investments in physical goods such as homes, factories, and buildings. To the degree that individuals shifted savings into riskier investments, such as the stock market, those assets have become priced higher than they otherwise would be (possibly leading to the next financial “bubble” that will burst). Allowing market participants to respond on their own rather than imposing the Fed’s wishes would mitigate these problems by not artificially distorting interest rates.
Since the 2008 financial crisis, the Fed has also expanded its role in fiscal and regulatory policies. For instance, the Fed’s quantitative easing (QE) programs have purchased and continue to purchase trillions of dollars of the mortgage-backed securities (MBS) and debt of the insolvent government-sponsored enterprises Fannie Mae and Freddie Mac, a decision that leaves taxpayers responsible for the assets that led to the financial crisis. Through the Dodd–Frank bill, the Fed now has enormous regulatory power over even non-bank financial firms. The Fed now has a large say in whether these firms are designated for special “enhanced” regulations and also has the ability to apply specific rules and regulations to the designated firms on a case-by-case basis, thus adding to uncertainty in the private markets.
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