Prices are up 8.6% in 18 months. Fed’s economic practices are doing more harm than good

In medical school the students are taught to first, do no harm. The doctors of our money need to learn the same lesson.

A year ago, I wrote that policymakers at the U.S. Federal Reserve had moved well beyond their traditional role by directing cash to particular industries and buying long-term debt.

Earlier this month, the Federal Open Market Committee announced plans to slow its purchases of long-term government bonds and mortgage-backed securities. However, the committee remains committed to “ongoing purchases and holdings of securities,” because it believes these purchases support “the flow of credit to households and businesses”.

The concern that households and business firms can’t get loans is also outside the scope of this organization, and it appears unfounded based on the Fed’s own data.

First, making it easier to get loans wasn’t the original plan for this quasi-government entity. The Federal Reserve Act was signed by President Woodrow Wilson in 1913. This act of Congress created the central banking system and provided legal authority for issuing Federal Reserve Notes, or what is more widely known as the U.S. dollar.

That is, Congress originally asked the Fed to simply to issue and maintain the purchasing power of our currency. Unfortunately, the cost of living has risen 8.6% in just the past 18 months by the Fed’s preferred measure of inflation, the personal consumption expenditure index. To do its original job, the Fed needs to control this inflation with higher bank interest rates, not by encouraging more debt and spending.

The second question is whether the flow of credit has been interrupted or somehow constrained. Not according to data that the Fed tracks.

Each quarter the Fed estimates a balance sheet for U.S. households and nonprofit organizations. As of June 30, this report showed that we have over $17 trillion in debt outstanding. This is on top of government debt we are all responsible for, and it is 19% higher than prepandemic levels. Even during the second and third quarters of 2020, household debt fell by less than 2%.

Congress may be asking the Fed to do more to help the economy, but with both the cost of living and levels of debt rising, it appears the Fed is doing more harm than good.

Remember always to first do no harm. A return to the original mission of the Federal Reserve is in order.