What the Federal Reserve Does
The Federal Reserve is the central banking system of the United States, established by Congress in 1913. Its dual mandate, established by law, is to pursue maximum employment and stable prices (meaning low inflation). It pursues these goals primarily through monetary policy: setting the federal funds rate (the interest rate at which banks lend to each other overnight), which cascades through the entire economy to affect mortgage rates, business borrowing costs, consumer credit, and ultimately employment and inflation.
The Fed is governed by a Board of Governors appointed by the president and confirmed by the Senate, and a Federal Open Market Committee (FOMC) that makes interest rate decisions.
The Conservative Critiques
Conservative skepticism of the Federal Reserve comes in several distinct flavors. The Austrian economics tradition, associated with Friedrich Hayek and the Ludwig von Mises Institute, argues that central banking itself is a form of central planning that distorts price signals and creates artificial boom-bust cycles. From this view, the Fed’s expansionary monetary policy in the 2000s contributed directly to the 2008 financial crisis.
The monetarist critique, associated with Milton Friedman, is less radical: the Fed should be constrained by a rule (such as targeting a fixed monetary growth rate) rather than having discretionary authority to set rates. Friedman argued that the Fed’s greatest failure was its contractionary policy during the Great Depression.
The political accountability critique, associated with Senator Rand Paul’s ‘Audit the Fed’ proposals, argues that the Fed operates with insufficient transparency and congressional oversight for an institution with enormous power over the economy.
The Rand Paul Position
Senator Rand Paul, who appeared on Breaking Battlegrounds, has been the most prominent Senate voice for Federal Reserve reform. His ‘Audit the Fed’ legislation would subject the Fed’s monetary policy decisions to Government Accountability Office review, a proposal the Fed and most mainstream economists oppose as threatening central bank independence but that conservatives support as basic democratic accountability.
Frequently Asked Questions
What is the Federal Reserve?
The Federal Reserve is the central banking system of the United States, established in 1913. It controls monetary policy by setting interest rates and managing the money supply, with a dual mandate to maintain maximum employment and stable prices.
Why do conservatives distrust the Federal Reserve?
Conservative critiques range from Austrian economics arguments (central banking distorts markets) to accountability arguments (the Fed has too much power with too little congressional oversight). Senator Rand Paul’s Audit the Fed movement represents the mainstream conservative reform position.
What is Audit the Fed?
Audit the Fed is legislation sponsored by Senator Rand Paul that would subject the Federal Reserve’s monetary policy decisions to Government Accountability Office review, increasing congressional oversight of the institution.
