Ever since the Fed paused their plans to increase the Federal Funds Rate, many commentators have guessed that the Fed might be expecting another crisis and downturn, and that any “brake tapping” might bring it about too soon.

And while there is debate over whether or not zero is actually a lower bound for the central bank’s targeted Federal Funds Rate, most have concluded that the Fed is “out of firepower.” They have exhausted their stock of effective monetary policy tools like an army in a fierce battle for economic growth and financial stability but with an empty arsenal.

Both of these silly analogies involving cars and arsenals are showcased in this recent CNN Money article. Here are two examples of the analogies in use:

A Fed rate hike is supposed to signal good news — the U.S. economy is doing so well that the central bank feels the need to tap the brakes to ensure healthy growth. But the opposite has happened — hitting the brakes, ever so lightly, has become a worry sign.Waiting too long could backfire on the Fed if inflation picks up quickly or another crisis hits. Rates are already low and the Fed’s balance sheet is still big from all the securities it has already bought up. It doesn’t have a lot of “ammo” left to boost the economy.

These analogies are unfortunately as pervasive as they are wrong. As Hayek pointed out in his famous rap battle (round 2) with Keynes,

The economy’s not a car, there’s no engine to stall

No expert can fix it, there’s no “it” at all.

The economy’s us, we don’t need a mechanic

Put away the wrenches, the economy’s organic

And as for the firepower/arsenal analogy, the Fed has always only had one weapon: artificial credit expansion. The weapon is not like a rifle or a drone or a fleet of battleships, but a medieval bucket of filth poured from atop a castle.

A rifle can be aimed at a specific target. Artificial credit expansion may be funneled through banks and financial intermediaries, but it wreaks havoc throughout the economy through malinvestment and consumption binges.

Militarized drones and battleships are also very effective at achieving their users’ desired outcomes. Artificial credit expansion has only hurt the Fed’s stated goals of stable prices, maximum employment, and financial stability. This is plainly evident just by looking at the Fed’s own data of measures (from the BLS) of their own stated goals.

CPI UR April 4, 2016Jonathan Newman

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.

 

Tweet

Follow Mises Institute

Follow @mises

When commenting, please post a concise, civil, and informative comment. Full comment policy here.

Add Comment

CPI UR … Read More of Original Article From Mises WIre