Investment Viewpoint

Dr. Tiemann’s Viewpoint Notes

Jonathan Tiemann’s unique viewpoint expresses itself in a series of engaging essays — what we call “Notes” — written on a variety of topics. View the most recent dozen of his previously published investment notes by clicking the slider below or visit the Viewpoint Archives to see all Notes, in reverse chronological order. If you click on the Note link, you will be taken to the page for that note, where you can access the PDF format of the note, make comments and sort the notes based upon categories and tags.

Dr. Tiemann’s Most Recently Released Note:

 

The Purpose of Monetary Policy

By Jonathan Tiemann, Ph.D. (June 2016)

 

The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded. Today, the Federal Reserve’s duties fall into four general areas:

• conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates
• supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers
• maintaining the stability of the financial system and containing systemic risk that may arise in financial markets
• providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system

— Mission of the Federal Reserve System

The Federal Reserve

The Federal Reserve, as Chair Janet Yellen and her predecessors have long reminded us, operates under a mandate from Congress “to conduct monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.” In the years since the financial crisis of 2008, the Fed has sought to fulfill its mandate through a policy of very low short-term interest rates, including a multi-year period in which they targeted a Federal Funds rate near zero. Broadly speaking, this accommodative, or easy-money, policy is meant to stimulate the economy by providing businesses and consumers somewhat easier access to credit, and to make business investment more attractive by lowering financing costs. Fed officials have also stressed their goal of preventing deflation from taking hold, arguing that in deflation, businesses and consumers defer purchases and investments, hoping for lower prices in the future. This has the effect of reducing aggregate demand, which tends to slow economic activity.

In recent years the Fed has used unconventional tools, including direct asset purchases (quantitative easing) and a dramatic expansion of its balance sheet, to pursue its policies. These unconventional tools have elicited unusually vocal criticism. Much of this criticism is the reflex of those that assume that any large-scale action by a governmental entity must be misguided, and in particular any economic policy that operates against the way an unregulated market would function must have unintended consequences, and primarily negative ones. Philosophically, some of these critics object to the notion that any group of appointed officials, no matter how expert, should guide our money supply, which they feel should be the province of Congress, or interest rates, which they feel should emerge organically from market processes. For some, the logical conclusion of this line of thinking is a return to a gold standard. A gold standard, they argue, would return control of the coinage of money to Congress, and the setting of interest rates to the market. But reverting to a gold standard to would amount to a shift to a destabilizing monetary regime. The trouble is that the money supply under a gold standard tends to shift in ways that can amplify both booms and busts.

[Click on this highlighted title to access the complete note on The Purpose of Monetary Policy here.]


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