Fed Policies Are Setting the Stage for Another Bust: NCPA
August 18, 2015
By the time the Federal Reserve Chair Janet Yellen and the other members of the Board of Governors become concerned about their easy money policies, they will have set the stage for another “bust,” like the 2008 financial crisis, warns Richard Ebeling, BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel in Charleston, South Carolina, in a new study from National Center for Policy Analysis.
Since 2009, the Federal Reserve has kept the Federal Funds interest rate at zero, while injecting around $4 trillion into the banking system. Concerned with the inflationary impact of its own policies, however, the Fed then pays banks not to lend most of that money by offering higher interest rates than the market.
The Federal Reserve’s monetary control leads to price inflation, reduces the value of the money and ultimately creates imbalance in savings and investments, all of which are unsustainable in the long run. “Yellen’s monetary and interest rate policies [intended] to assure full employment and stable prices,” says Ebeling, “…could set the stage for another ‘bust’ following another unsustainable ‘boom.’”
Market interest rates perform an important function, but the Fed’s interference distorts the underlying supply and demand relationships between savings and the economy. Treating interest rates as “policy tools” to influence the general levels of employment and prices in the economy, the Federal Reserve prevents interest rates from doing their “job” in a functioning market economy.
“Ending Federal Reserve power and authority to manipulate the money supply and interest rates remains the only way to bring an end to these cycles of booms and busts,” says Ebeling. “This seems unlikely though with ‘activist’ policy addicts like Yellen running the central bank.”