Letter: Here are three things the Fed is actually good at

Published in the Financial Times.

Your Big Read feature “Is Warsh set to be the next Fed fall guy?” (April 20) repeats a myth which should be long dead: that the Federal Reserve’s job includes “the management of the biggest economy on the planet”.

On the contrary. To “manage the economy” would require knowledge of the future that neither the Fed nor anyone else has, or can have.

At its creation in 1913, it was thought that the Fed would prevent future financial crises and panics. Obviously it didn’t.

In the heyday of Keynesian hopes in the 1960s, it was thought that the Fed could be part of ending financial cycles. Obviously it couldn’t.

As Fed chairman Jerome Powell brilliantly observed in August 2023, the Fed is “navigating by the stars under cloudy skies”. So it is and always must be.

The Fed actually is good at three things. One, printing money to finance financial crises. Two, creating constant inflation and depreciation of the currency it creates, and three, supporting the power of the government by monetising the government’s debt.

But “managing the economy” is far and forever beyond its capability.