OUR WORLD SPINS on the expedient use of credit—short-term, long-term, hedged, and parlayed. While none of us can know the future, our financial decisions must adhere to some semblance of a plan, and in the United States the market in credit is what we use to order those commitments. Backing it are not only the banks but the Federal Reserve System—the central bank of the United States.
Variously regarded over the decades as the domain of dispassionate economic experts or of rapacious financier-bankers, the Fed has gradually come to acquire a sacred aura of national authority. Three times in living memory it has emerged to exercise an apparently sovereign power over the course of economic and political events: first, with the “Volcker Shock” from 1979 to 1983, in which the Fed’s then-chairman Paul Volcker pushed aggressively for the prolonged recession that ended the last era of persistently high inflation; then, during the 2008 financial crisis, which saw zero percent interest rates and the global refinancing operation of the North Atlantic banking system; and most recently during the financial panic at the onset of the Covid-19 pandemic, when the Fed again assumed its role as a guardian of world liquidity and solvency.
Shaped by this history, the long-divided faiths of American economic opinion today preach worship of a single church. Two recent books of vastly different substance reveal the current consensus about the Fed’s centrality. In The Federal Reserve: A New History, Robert Hetzel, for four decades a staff economist at the Federal Reserve Bank of Richmond and today a visiting scholar at the Federal Reserve Bank of Chicago, tracks fluctuating interest rates and the accompanying changes in economic thought and central bank policy to make the case that the Fed was the common “causal factor” in “each recession and each inflation” over the last century—and will be for those to come. Hetzel is a conservative monetarist in the Milton Friedman tradition. By contrast, Jeanna Smialek, who writes about the Fed for the New York Times, is canny enough to tell us that “people who claim to have it all figured out are oversimplifying.” Yet the title of Limitless: The Federal Reserve Takes on a New Age of Crisis, her pop history and insider-ish narration of the central bank’s dramatic moves during the height of the pandemic, shows that Smialek shares the premise that the Fed is a center of world-creating power.
The two books demonstrate the different ways in which devout Fed worship is part of elite desire to assign responsibility for the economy to powers above elected government. Nowhere is this more evident today than in what passes for public thinking about the challenge of inflation. Since the spring of 2021, when prices began their ascent, the Fed has naturally beckoned popular allegiance to its default leadership in the nation’s anti-inflation program. As President Joe Biden put it last May, his plan to fight rising prices “starts with a simple proposition: respect the Fed and respect the Fed’s independence.” Such paeans assume a kind of omnipotence which is seldom questioned in “respectable” circles. What kind of national response to inflation, which often comes with full employment, could even exist outside of Fed decision-making? If we are thinking about the future, it is a problem we must honestly consider. Unfortunately, as these two books show, a serious consideration of alternatives to central bank unilateralism—once a vital part of American economic life—is not to be found among our professional Fed watchers today.