Federal Reserve Policy

From Libertarian Wiki

Credit is like a bridge that connects two riverbanks.

On one side are potential lenders. On the other side are potential borrowers. At some market driven interest rate, both sides are happy with the transaction and traffic crosses the bridge.

Suppose the Federal Reserve artificially increases interest rates. Less commerce crosses the bridge. Suppose the Federal Reserve artificially lowers interest rates. Again, less commerce crosses the bridge.

The economy is healthiest if the Federal Reserve sets interest rates very close to the market driven rate. In other words, the economy works best if the Federal Reserve butts outs and lets the market find its own balance.

1) The government or its sponsored bureaus should not try to prevent irrational exuberance.

2) It should not increase interest rates until the economy collapses in order to prevent a wage-price spiral.

In fact, a high cost of money is a significant cause of inflation.