Stocks rose Wednesday following the Federal Reserve's announcement of the
first interest rate increase since 2006. However, stocks fell just two days
later. One reason the positive reaction to the Fed's announcement did not last
long is that the Fed seems to lack confidence in the economy and is unsure
what policies it should adopt in the future.
At her Wednesday press conference, Federal Reserve Chair Janet Yellen acknowledged
continuing "cyclical weakness" in the job market. She also suggested that future
rate increases are likely to be as small, or even smaller, then Wednesday's.
However, she also expressed concerns over increasing inflation, which suggests
the Fed may be open to bigger rate increases.
Many investors and those who rely on interest from savings for a substantial
part of their income cheered the increase. However, others expressed concern
that even this small rate increase will weaken the already fragile job market.
These critics echo the claims of many economists and economic historians
who blame past economic crises, including the Great Depression, on ill-timed
money tightening by the Fed. While the Federal Reserve is responsible for our
boom-bust economy, recessions and depressions are not caused by tight monetary
policy. Instead, the real cause of economic crisis is the loose money policies
that precede the Fed's tightening.
When the Fed floods the market with artificially created money, it lowers
the interest rates, which are the price of money. As the price of money, interest
rates send signals to businesses and investors regarding the wisdom of making
certain types of investments. When the rates are artificially lowered by the
Fed instead of naturally lowered by the market, businesses and investors receive
distorted signals. The result is over-investment in certain sectors of the
economy, such as housing.
This creates the temporary illusion of prosperity. However, since the boom
is rooted in the Fed's manipulation of the interest rates, eventually the bubble
will burst and the economy will slide into recession. While the Federal Reserve
may tighten the money supply before an economic downturn, the tightening is
simply a futile attempt to control the inflation resulting from the Fed's earlier
increases in the money supply.
After the bubble inevitably bursts, the Federal Reserve will inevitability
try to revive the economy via new money creation, which starts the whole boom-bust
cycle all over again. The only way to avoid future crashes is for the Fed to
stop creating inflation and bubbles.
Some economists and policy makers claim that the way to stop the Federal
Reserve from causing economic chaos is not to end the Fed but to force the
Fed to adopt a "rules-based" monetary policy. Adopting rules-based monetary
policy may seem like an improvement, but, because it still allows a secretive
central bank to manipulate the money supply, it will still result in Fed-created
booms and busts.
The only way to restore economic stability and avoid a major economic crisis
is to end the Fed, or at least allow Americans to use alternative currencies.
Fortunately, more Americans than ever are studying Austrian economics and working
to change our monetary system.
Thanks to the efforts of this growing anti-Fed movement, Audit the Fed had
twice passed the House of Representatives, and the Senate is scheduled to vote
on it on January 12. Auditing the Fed, so the American people can finally learn
the full truth about the Fed's operations, is an important first step in restoring
a sound monetary policy. Hopefully, the Senate will take that step and pass
Audit the Fed in January.
