How Neutral Is the Fed?

A Measure of Humility

The Federal Reserve Act, passed at the close of 1913, created the current U.S. central bank in order to “establish a more effective supervision of banking in the United States.”  However, in response to monetary-policy errors committed by the central bank, Congress has, from time to time, amended the act.  For example, during the 1970’s, when Americans faced double-digit inflation and unemployment—for which, according to some critics, Fed policy was responsible—Congress passed the Humphrey-Hawkins Act of 1978, sponsored by Sen. Hubert Humphrey (D-MN) and Rep. Augustus Hawkins (D-CA), which required the Fed to establish a monetary policy for the country that would “promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”  Of course, supporters of the central bank reject this sort of meddling and argue instead for a laissez-faire approach toward the Fed.

The Fed includes, according to its own literature, “a central governmental agency—the Board of Governors—in Washington, D.C., and twelve Regional Federal Banks.”  The Federal Open Market Committee (FOMC) is a major component of the system.  It includes members of the board of governors, the New York Fed president, and presidents of four other Fed member banks who serve on a rotating basis.  Meeting eight times annually, the FOMC...

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