At RealClearPolicy No Labels has a post somewhat reminiscent of the analysis posts at Vox.com on the Federal Reserve. In the article five facts are highlighted:
- The Federal Reserve was created in 1913 by President Woodrow Wilson following the Panic of 1907, one of the worst global financial crises of the 20th century. The Federal Reserve Act, which President Wilson signed into law, established a central bank for the entire country (for the third time, but the first time successfully).
- The modern-day Fed was shaped by President Jimmy Carter, who signed the Federal Reserve Reform Act of 1977.
- During the 2008 financial crisis, the Fed helped stabilize the economy by deploying a number of tools, including cutting interest rates, providing targeted assistance to financial institutions, and buying mortgage bonds.
- However, not everyone agrees that the changes to the Fed since the financial crisis have benefited the American public.
- While Trump is not the first American president to speak out against the Fed, there haven’t been many others.
When I read that fifth point I was reminded of James Carville’s wisecrack to the effect that when he died he wanted to come back as the bond market so he could intimidate everybody.
I only have a couple of remarks. First, the present long-term interest rate is 3.19%, the highest it has been in a decade. Is the Federal Reserve succeeding in its mandate? Is 3.19% high, medium, or low? As a point of comparison in 1977 the long-term interest rate was around 8% and prior to 1977 it had been pretty stable at around 5% (roughly the average over time) for many years. My second remark is that several economists and politicians have noticed that Fed policy has been running in a direction opposite to that of federal fiscal policy for a long time. When the Federal government spends money to promote economic growth, the Fed tightens monetary policy, vitiating the effect of the fiscal policy.
Third, since 1977 the Gini index for the United States, a measurement of income inequality, increased sharply and has remained at that much higher level level ever since. The big jump preceded the income tax reform of the 1980s, the large increase in low wage immigrant labor in the United States, and the big increase in the U. S. imports of manufactured goods.
How big a factor has Fed policy been in creating income inequality in the United States?