The Federal Reserve’s Mandate

by J. Archer on October 22, 2010

The Federal Reserve Act of 1913 is the legislation that originally legalized the formation of the Federal Reserve. It was born out of the fear that ensued during the “Panic of 1907” in which the markets fell 50% and large depositors pulled money from banks. This run on the banks created massive public riots and fear. This fear was used to push through the Federal Reserve Act which when examined closely resembles little more than a classic governmental “power grab”.

So today we continue to tolerate the Federal Reserve Bank. Let us take a look at the Fed’s mandate, shall we? According to this legislation, the Federal Reserve’s mandate is

To promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

In a speech by Governor Frederic S. Mishkin he says

Because long-term interest rates can remain low only in a stable macroeconomic environment, these goals are often referred to as the dual mandate; that is, the Federal Reserve seeks to promote the two coequal objectives of maximum employment and price stability.

Based on the history that has transpired between the formation of the Fed and today, how should we grade them on their performance and implementation of their dual mandate? In all honesty, would you give them high marks? I certainly would not.

In examining the Fed mandate on maximum employment: the Fed does not and can not create jobs or employment. Jobs are the result of creating profitable businesses which produce salable products and services. The Fed does neither. Nor will it ever.

What if we look at the part of their mandate regarding long term interest rates? To me this is little more than price fixing. The Fed has the ability to set borrowing rates for its member banks. And, almost every bank in the nation is a member bank. Which means the Fed controls the cost of capital ultimately all the way through to the consumer… You! In any other business this type of action would be labeled a monopoly because the Fed has effectively eliminated any competition that the free market could place on interest rates. Ask yourself who the beneficiary of this action is? Is it you?

Lastly, the point regarding price stability… I would love to know if the guys at the Fed even know what price stability is. Is anything you purchase the same price as it was 5 years ago? What about 10 years ago? How about 2 decades ago? No, of course it isn’t. The Fed steals purchasing power from us on a regular basis through inflation.

They create money from nothing… Printing money, quantitative easing or whatever word you choose to insert is just inflation. The Fed even tells us they have a 2% per year target! Translation: You will lose at least 2% of your money’s purchasing power per year. Is this acceptable to you?

In 1908 you could buy a Hershey bar for $0.03 cents; today you will pay about $1.00 or more! That is anything but price stability. That is a more than 95% loss in purchasing power. I think it is fair to say the Fed has fallen well short on it’s price stability actions and in today’s global economy a weakening dollar means less purchasing power for the citizens of the US.

The Fed has been a colossal failure when judged against it’s own purpose, and it is not looking out for you. It is time to educate yourself and work within your capability to create higher returns on your invested cash where possible, because moderate returns in an inflationary environment could wipe out your gains or even mean you have sustained a negative real return.

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