Has the Fed helped?

Date posted: March 12, 2012

The Federal Reserve has traditionally been a rather obscure agency that few outside of finance and economics knew about. But the Fed has already been a prominent subject in this year’s political campaigns. Some say the Fed has outlived its usefulness, and may even be harming the economy’s long-run health. How can we decide if the Fed is helpful or harmful? N.C. State University economist Mike Walden responds.

“Well … that’s a big question, and quite frankly we’re not going to fully answer it here. You do have different opinions on it. I will say the Federal Reserve has been given a tall task by the Congress. The Congress has written a charter. The Federal Reserve essentially controls it, because the Congress has told the Federal Reserve, ‘Federal Reserve, we want you to enact policies that do two things: One, result in very low inflation; but two, result in full employment.’ That’s a very difficult set of goals to reach.

“Supporters of the Fed say that the Fed has done the best it can, and they also look at things like interest rates and inflation and say that you can make the case, then, since the inception of the Fed and since when the Fed really got used to its powers — and so you really have to go into the 1930s, late 1930s to start that — that the level of interest rates on average and the level of inflation on average have been much lower. So, supporters of the Fed use that as an argument. The Fed has brought some financial stability to the country.

“On the other hand people who criticize the Fed say, ‘Hey, the Fed really missed three big issues and episodes in the economy they didn’t deal with very well.’ One was the Great Depression. Number two was the stagflation of the 1970s, where we had both high inflation and high unemployment. And number three, the recent financial crisis that led to the worst recession in 80 years.

“So, you’re going to get different views on the Federal Reserve, depending on what sets of evidence you want to emphasize.”

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