Central Banks Focus On The Wrong Thing

What are the implications of the Fed’s current policy framework being invalidated?
An obvious and very important one is that debates and discussions are not occurring in the places where they can make the most impact, because the focus isn’t there.
If the focus isn’t there, then how can current problems be solved?
A good instance of this is the raging debates that surround Fed policy in the direct aftermath of an economic crisis.
After all, economic conditions during such periods are clouded with extreme uncertainty, with conditions in the present day, as well as back in ‘08 serving as prime examples. Such uncertainty clouds people’s ability to project into the future, while severely testing policymakers’ need to balance present circumstances with future risks.
Today, we have mainstream narratives and commentary going hysterical over inflation risks, and not without reason. Their position is backed by record breaking inflation data, as well as trillions in fiscal stimulus and monetary stimulus.
However, the Fed cites these inflationary risks as “transitory”, and remains concerned about the sustainability of the recovery in the US economy.
Which viewpoint will prove to be correct? Only time will tell, but it is important to point out that both the Fed, as well as those who are currently criticizing it for being too lax, base their worldviews and thinking on the same models that are taught in school.
Which means that there is a real possibility that both sides are misreading the situation.
Why? Because the models they believe in are built on a central bank-centric model of the economy, and by extension believe that bank reserves are a key piece of the macroeconomic puzzle.
As previous articles in this series have shown, they aren’t, and the Fed does not control interest rates in the omnipotent way that almost everyone, including the Fed itself, believes that they do.
Furthermore, bank reserves really aren’t as useful as they are thought, and taught, to be – because money is not created in the way everyone thinks it is (Fractional Reserve Banking is a myth).
The irrelevance of bank reserves, and therefore their inability to affect any sort of impactful economic outcome further demonstrates that the central bank-centric model is an inaccurate reflection of how the financial system is really structured.
And if the world does not work in the way all of these folks think it does, then doesn’t that make both sides debating whether or not the Fed needs to tighten monetary policy a complete waste of time?
Instead of endlessly debating what the Fed should or should not do with regards to tapering QE and interest rates, would it not be better to spend that time and intellectual power on areas that will actually make a difference?
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