TRUMP IS WRONG ABOUT THE FED, AND THE FED IS WRONG ABOUT ECONOMICS.

• Author: De Rugy, Veronique

AMERICANS ARE PROBABLY accustomed by now to President Donald Trump lashing out against Federal Reserve Chairman Jerome Powell on Twitter. In one recent tweet, Trump asked his followers which man is America's "bigger enemy": Powell, or Chinese President Xi Jinping. In another tweet, Trump wrote that "China is not our problem.... Our problem is with the Fed" and called Powell "clueless."

The Fed's biggest crime, according to Trump, is that Americans would be richer and the economy would grow faster if only Powell would cut interest rates by a full percentage point. After months of resistance, Federal Reserve officials in September announced a reduction of interest rates by a quarter of a point. That wasn't enough for Trump, who now demands that "The Federal Reserve should get our interest rates down to zero, or less" in response to the European Central Bank cutting its rates.

Following these repeated groundless attacks, libertarians and free market conservatives have found themselves jumping to the institution's defense. But when it comes to bad economic thinking, there's plenty of blame to go around.

Take Congress' 1977 amendment to the Federal Reserve Act, which gives the Fed its dual mandate to achieve both price stability and maximum sustainable employment. The first part gives the Fed control of the money supply with the goal of containing inflation and creating stability in the financial system. By most accounts, the body has done a poor job of it. Research suggests this failure has played a role in producing most of the country's severe banking crises, including those in the 1920s, the 1930s, the 1980s, and the 2000s.

In the Fed's defense, the goal itself is ludicrous. Independent or not, the agency has no more ability to determine the correct supply of money than would an agency set up to determine the correct amount of bread or steel. Determining the right supply of money should be left--as it is with other goods--to competitive markets. As F.A. Hayek argued, and as George Mason University economist Larry White and the Cato Institute's George Selgin have shown, the knowledge necessary to determine the appropriate supply of anything, including money, is discovered and revealed only through the competitive market process.

Then there's the Fed's second mandate of boosting employment. This, of course, reflects most politicians' belief that it is the role of the government to create, control, and maximize the number of jobs.

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