THE FEDERAL RESERVE’S MONETARY POLICY AND ITS EFFECTS (2008-2020): AN AUSTRIAN PERSPECTIVE
DOI:
https://doi.org/10.52195/pm.v18i1.705Abstract
This paper aims to describe, according to the Austrian School of Economics, how the monetary policies adopted by the Federal Reserve since 2008 (Quantitative Easing - QE, Qualitative Easing - QL and Zero Percent Interest Rate Policy - ZIRP) prolonged the mismatches in resource allocation, made the US economy weaker (individuals and companies became more dependent on artificially low interest rates) and increased the risks and leverage in the financial market. It is argued that, after the adoption of these policies, the Fed would not be able to normalize monetary policy, which was confirmed in 2019, when the Fed began to cut the Federal Funds Rate (FFR) and did QE, and, mainly, in 2020, when it returned to ZIRP and did a bigger QE. It is concluded, therefore, that the Fed makes the economy weaker and increases the financial market’s leverage. The real economy is harmed, while the financial market (large publicly traded companies and financial institutions) and the government (which increases its spending and indebtedness) are benefited.
Keywords: Austrian School of Economics, United States, Central Banks, Federal Reserve, Monetary Policy, Economic Cycles.
JEL Classification: E14, E32, E43, E44, E52, E58, E62, H60.
References
Alden, L. (2020): “Banks, QE, and Money-Printing,” Available at: https://www.lynalden.com/money-printing/, 11/22/2020.
Bagus, P. & Howden, D. (2009a): “Qualitative Easing in Support of a Tumbling Financial System: A Look at the Eurosystem’s Recent Balance Sheet Policies,” Economic Affairs, 29 (4), pp. 60-65. Available at: https://ssrn.com/abstract=1512878 or http://dx.doi.org/10.1111/j.1468-0270.2009.01948.x DOI: https://doi.org/10.1111/j.1468-0270.2009.01948.x
- (2009b): “The Federal Reserve and the Eurosystem’s Balance Sheet Policies During the Financial Crises: A Comparative Analysis,” Romanian Economic and Business Review, 4 (3), pp. 165-185.
- (2010): “The Term Structure of Savings, the Yield Curve, and Maturity Mismatching,” The Quarterly Journal of Austrian Economics, 13 (3), pp. 64-85. Available at: https://mises.org/library/term-structure-savings-yield-curve-and-maturity-mismatching
Bagus, P. & Schiml, M. (2009): “New Modes of Monetary Policy: Qualitative Easing by the Fed,” Economic Affairs, 29 (2), pp. 46-49. Available at: https://ssrn.com/abstract=1412908 or http://dx.doi.org/10.1111/j.1468-0270.2009.01893.xBagus, P. (2009a): “The Fed’s Dilemma”. Available at: https://mises.org/library/feds-dilemma, 10/08/2009. DOI: https://doi.org/10.1111/j.1468-0270.2009.01893.x
- (2009b): “The Quality of Money,” The Quarterly Journal of Austrian Economics, 12 (4), pp. 22-45. Available at: https://mises.org/library/quality-money
Beltrão, H. (2019): “Entrando Pelo Cano da Liquidez – O Congelamento Momentâneo do Mercado Repo Americano”. Available at: https://mises.org.br/Article.aspx?id=3095, 09/26/2019.
Howden, D. (2013): “Who Benefits from the Fed?”. Available at: https://mises.org/library/who-benefits-fed, 03/07/2013.
Instituto Mises Brasil (2016): “Afinal, o Fed irá Elevar os Juros? Sua Decisão Refletirá sua Posição em Relação a Trump”. Available at: https://www.mises.org.br/Article.aspx?id=2585, 12/12/2016.
Lacalle, D. (2017): “The Rise of Zombie Companies — And Why It Matters”. Available at: https://mises.org/library/rise-zombie-companies-—-and-why-it-matters-0, 08/08/2017.
- (2019a): “Quantitative Easing Is Back”. Available at: https://www.dlacalle.com/en/quantitative-easing-is-back/, 10/09/2019.
- (2019b): “The Repo Crisis Shows the Damage Done by Central Bank Policies”. Available at: https://mises.org/wire/repo-crisis-shows-damage-done-central-bank-policies, 10/11/2019.
Maharrey, M. (2020a): “Extraordinary Federal Reserve Policy Began Over a Year Ago”. Available at: https://schiffgold.com/key-gold-news/extraordinary-federal-reserve-policy-began-over-a-year-ago/, 03/15/2020.
- (2020b): “Who Is Buying All This US Government Debt?”. Available at: https://schiffgold.com/commentaries/who-is-buying-all-this-us-government-debt/, 06/17/2020.
Mordasov, P. (2020): “How Long Can the Fed Keep This Time Bomb from Exploding?”. Available at: https://mises.org/wire/how-long-can-fed-keep-time-bomb-exploding, 10/21/2020.
North, G. (2015): “Ao Contrário do que diz a Imprensa, o Banco Central Americano não tem como ‘Elevar os Juros’”. Available at: https://www.mises.org.br/Article.aspx?id=2213, 10/29/2015.
Roque, L. (2018): “Como Ocorreu a Crise Financeira Americana”. Available at: https://www.mises.org.br/Article.aspx?id=1696, 08/17/2018.
Rothbard, M. (1969): Economic Depressions: Their Cause and Cure, Auburn, Alabama: Ludwig von Mises Institute [1st edition, 2009]. Available at: https://mises.org/library/economic-depressions-their-cause-and-cure-4
Schiff Gold (2019a): “Fed Runs Repo Operations; Is It Baby-Stepping Toward QE?”. Available at: https://schiffgold.com/key-gold-news/fed-runs-repo-operations-is-it-baby-stepping-toward-qe/, 09/18/2019.
- (2019b): “Fed Set to Launch “Massive” Bond-Buying Program — In Other Words QE”. Available at: https://schiffgold.com/key-gold-news/fed-set-to-launch-massive-bond-buying-program-in-other-words-qe/, 10/15/2019.
- (2019c): “Was Ben Bernanke Lying or Just Wildly Mistaken?”. Available at: https://schiffgold.com/key-gold-news/was-ben-bernanke-lying-or-just-wildly-mistaken/, 02/21/2019.
- (2020a): “The Decade of Debt”. Available at: https://schiffgold.com/key-gold-news/the-decade-of-debt/, 01/02/2020.
- (2020b): “Which Corporate Bonds the Fed Has Bought So Far?”. Available at: https://schiffgold.com/key-gold-news/which-corporate-bonds-the-fed-has-bought-so-far/, 06/29/2020.
Schlichter, D. (2011): “Operation Twisted Logic”. Available at: https://mises.org/library/operation-twisted-logic, 09/26/2011.
Ulrich, F. (2015a): “O que o Fed Poderá Fazer”. Available at: https://www.mises.org.br/Article.aspx?id=2022, 01/30/2015.
- (2015b): “Qual é a Estratégia de Saída do Fed?”. Available at: https://www.mises.org.br/Article.aspx?id=2019, 01/27/2015.