Once again, the Federal Reserve Open Market Committee has announced its intention to continue to artificially keeping interest rates “exceptionally low” for a “extended period.”
Missed in virtually all the commentaries is the key question: Should a central bank try to manipulate interest rates? Lost in all the debate over monetary policy is the fact that interest rates are market prices that are supposed to tell the truth: the truth about actual supply and demand conditions in financial markets.
I discuss the importance of interest rates — and prices in general — reflecting the reality of market supply and demand conditions in a new article of mine on, “Market Interest Rates Need to Tell the Truth, or Why Federal Reserve Policy Tells Lies.”
By preventing interest rates from telling the truth central bank policy inevitably sends out wrong signals about the real relationships between available savings and desired investment. The results are malinvestments, unsustainable bubbles and general economic harm.
Misguided monetary policy got us into the current business cycle, and the Federal Reserve is continuing the same mismanagement in the post-bubble era. Unfortunately, as long as we have central banks we will suffer from the ill affects of monetary central planning — distortions, imbalances, and inescapable “corrections” known as recessions.
As Ludwig von Mises once pointed out,
The essence of the market economy is that the economic actions of the individuals are not performed by order of the government but spontaneously by the individuals. This requires also that the money, the medium of exchange, be independent of political influence. if not, the coming years will be nothing but a series of failures of various government monetary and credit policies. To prevent this, it is necessary to make everybody realize that there are no Keynesian miracles possible, and that you cannot improve the situation of the people by credit expansion.