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How Much Control Does the Fed Actually Have?

AIER Trustee Walker Todd recently took note of this provocative piece from George Selgin, which argues that the Federal Reserve Bank’s actions since the Great Recession have done little good to boost the economy.

Todd and Selgin, director of the Center for Monetary and Financial Alternatives at the Cato Institute, recently sat on a panel at Cato’s Monetary Conference in Washington, D.C.

According to Selgin, the natural movements of the economy, not the Fed’s interventions, are responsible for the low interest rates we have seen in recent years. The Fed’s expected increase in the federal funds rate later this year follows actual increases in interest rates amid improving economic data.

The Fed isn’t entirely powerless: The Bank’s raising of rates in the months before the collapse of Lehman Brothers in 2008 contributed to economic conditions that were too tight, causing real interest rates – and consumer demand — to crash, he argues.

In the years since, the Fed kept reducing the federal funds rate, which is intended to stimulate the economy by encouraging banks to lend out more money. But at the same time, actual loan rates were already well below the Fed’s targets already in place, and “by the time the Fed got around to lowering it, the federal funds target had ceased to have any meaning, save as a symbol of Fed officials’ vain hopes.”

When the Fed used unconventional policies like quantitative easing to pump money into the economy, it would have been expected to boost spending, inflation, and nominal interest rates. But those variables were only affected modestly, if at all, and the Fed’s interventions have caused uncertainty about the course of future interest rates, which dampens the appetite for investment, he argues.

You can read Selgin’s piece here. A piece about Walker Todd’s participation in the recent Cato panel can be found here.

Do you agree? Send us your comments below. We’d love to hear from you.

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