Report Detail Summary

Has the Fed lost its Compass?

August 04, 2019

Under the assumption that the Fed Controls the interest and inflation rate, the dual mandate is a feasible objective. The Fed can control the inflation rate directly and by controlling the real interest rate, it can control or regulate the real economy. The Humphrey-Hawkins dual mandate is within the Fed reach even without the help of fiscal policy. In such a world the Fed is all mighty. The assumption that money is only a veil yields very different policy implications. It means that monetary policy only affects the underlying inflation rate. Put another way the assumption here is that money will have no lasting effect on the real economy. That the economy’s real rate of return is determined by real factors and fiscal policy. If money is a veil, it will have no lasting impact on the real economy, this means that the Fed has been set up to fail by the Humphrey Hawkins legislation. It is ironic that the money is a veil assumption is the strongest case for fiscal policy.

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