It has been widely-publicized that Ben Bernanke, the new Federal Reserve Chairman, has strong views regarding the Federal Reserve Bank’s responsibility and ability to control inflation in the United States.

	Is the Fed Wizard a Humbug?

Fed watchers jump at the Chairman’s every utterance.

Security prices zip up and down at shifting hints of future interest rate policy.

Few indeed would contend that inflation is a good thing or would say that government should adopt a laissez faire attitude to the value of money.

Arguments begin, however, when we discuss exactly how inflation might be controlled or what part of government is responsible for the task.

Short-Term Rates and Inflation

Many seem to believe that by manipulating short-term interest rates in some precise fashion, the Federal Reserve Board should be able to keep inflation ‘under control’, without throwing the economy into recession.

However, among economists, there seems to be no consensus as to what the Federal Reserve’s magic formula should be regarding the timing and amount of short-term interest rate manipulation.

The lead story in the Wall Street Journal of July 5, 2020 reported that many leading economists fear that Chairman Bernanke has reached a ‘crossroads’ and may be about to go too far in raising rates — thereby pushing the economy into recession.

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In financial circles, discussion about the economy often is between people who believe that the federal reserve bank has power to control interest rates and inflation.

Arguments revolve around how fast the Fed should raise rates so as to hold down inflation without choking off business recovery.

For many, it is comforting to assume that the Fed actually determines interest rates and inflation and that the only question is how it should use this power. This reassures the nation that the government is in control.

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I developed the methods of Capital Flow Analysis over the six years 1998-2004, based on experience in capital markets.

I received a degree in economics from Cornell University in 1954, but Federal Reserve flow of funds accounts (first published in 1952) were never mentioned by my professors, and, because I was working abroad after 1956, I was unaware that the Federal Reserve began quarterly publications of these accounts in 1965.

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