The Fed’s Mission Impossible (Interview)

Mises Institute president Jeff Deist recently interviewed Danielle Booth, a veteran of the Dallas Fed and author of Fed Up: An Insider’s Take on Why the Federal Reserve is Bad for America, to discuss whether—or if—the Fed can ever return to “normal” monetary policy.

Booth said rates haven’t been “normal” since sometime before Arthur Burns, who headed the Fed from 1970-1978.

Paul Volker tried to get us back to ‘normal.’ In reaction to that, he had to suffer mutiny and was ousted, and Alan Greenspan came in as his successor and started a 30-year – over three decades – of over-intrusive monetary policy that unfortunately has been mimicked worldwide.”

After nearly a decade of quantitative easing in the wake of the 2008 financial crisis, the Federal Reserve has committed to shedding $2 trillion from its balance sheet. Booth said that was unlikely, to say the least.

Well, the $2 trillion bogie in theory, if everything runs along at the CBO estimates that are right up there with unicorns and fairy tales, they’ll get to $2 trillion by 2022. At that point, stick a fork in me because it’s all going to be well-done. Look, it’s apparent we will go into recession before the Fed can even cut its balance sheet in half. And I think that is where reasonable people should have a starting point of discussion. The Fed getting back to a trillion dollar balance sheet is just not going to happen.”

Booth said the bottom line is she doesn’t believe “normalized” is coming back.

She also talked about the impact of raising interest rates in a world drowning in debt. Booth agrees with what Peter Schiff has been saying – the economy simply can’t handle high rates. As a result, she thinks the Fed may well end up walking back its tightening.

Normalization may end up being a pipedream because central bankers have been so controlling of every aspect of price discovery for so many years … that they have literally rendered markets incapable of setting prices in a natural way.”

Of course, trying to keep interest rates artificially low comes with its own set of problems. It’s basically a no-win situation for Federal Reserve Chairman Jerome Powell. Raising interest rates might slow or even crash equity markets while causing US debt service to spike. But leaving rates low keeps the US economy in zombie status, punishing savers and preventing bad debt and malinvestment from clearing.

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