Looking In Reverse to Move Forward: Why U.S. Monetary Policy is Inherently Flawed

Photo credit: blogdnd via Flickr (CC BY 2.0)
Photo credit: blogdnd via Flickr (CC BY 2.0)

There’s been a lot of discussion about the Federal Reserve lately. To be independent of Congress or not to be. To audit or not to audit. To decide interest rates by discretion or by rule. Everyone has an opinion, but no one is mentioning the fact that the Federal Reserve’s process for deciding to print, pump, or dump is inherently flawed.

In order to decide what the interest rates should be, the Fed looks at past economic data and forecasts the future based on the past. They then make a prediction on what interest rates will maximize employment and minimize inflation. Nothing in real time. Everything they look at is at least a month old.

Anyone else see the problem here?

This would be like looking in your rear view mirror and driving forward. What could possibly go wrong?

But not just in any old car. More like driving a Dodge Viper. No one would drive that type of car with that much recklessness.  The American economy isn’t just some beater car! It’s top of the line, and should be handled with care.

The Fed is using modern-sounding but functionally archaic operating protocols out of place in the 21st century. Created in 1913 and officially switched to completely discretionary policy in 1971, the Fed is outdated and needs a high tech makeover.

The Bretton Woods and precursor classical gold standard made adjustments to the liquidity supply (creating and extinguishing dollars) based on real time data. Job creation, income mobility, and equitable prosperity requires that monetary policy be determined by looking forward, not by looking to the rear view mirror, or using deeply flawed econometric modeling, as now.

This helps explain why the American economy isn’t growing. The largest, most powerful economic institution is stuck in 1971.

Marco Rubio has been talking about a new American century. What should the Federal Reserve look like in this new century?

Terry Schilling is the executive director of American Principles in Action.