Control

The notion of control is a comforting illusion.  The chaos of reality can feel overwhelming at times, so draping a veil over it can create the semblance of order.  Instead, the best we can all likely hope for is influence over outcome but rarely if ever full control.  Economics is a perfect example of this lack of control.  There is no single puppeteer masterfully choregraphing outcomes, not even those within the various central banks around the globe.

But what about the Federal Reserve?  They must have it figured out, right?  Any casual observer would answer with a resounding “No.”  They have mandates regarding employment and inflation.  Despite their best efforts, they have yet to get inflation within their self-imposed target trend of 2.0 percent.  Now there is growing concern that even more control is going to be removed from this independent organization.

Murmurs about fiscal dominance are starting to increase.  This is a condition whereby a nation’s borrowing and spending overrides monetary policy, particularly its ability to control inflation.  Even in the most normal circumstances, the Federal Reserve only influences inflation, but alarms are being sounded by those worried that America’s deficit and debt levels are so high that monetary policy will soon no longer effectively bring inflation to target levels.

Paradoxically, the Fed is trying to influence two opposing goals: inflation and full employment.  The Federal Reserve cannot just hike rates until inflation vanishes because doing so would theoretically negatively affect employment levels in America.  If the central bank wants to advocate for employment, then it will have to keep rates under control.  In order to do so, they may end up buying more debt directly from the U.S. Treasury, but this act will simply push more cash into the system, adding fuel to the embers of inflation.  A real catch-22.

This is not a simple situation.  The Federal Reserve's balancing act is like walking a tightrope in a gusty wind.  Attempting to control inflation and maintaining high levels of employment is an intricate dance of economic variables and human lives.  Should the Fed attempt to navigate this potential landscape of the future, it will likely become clear that monetary policy is less about wielding control and more about managing unpredictable tides of economic forces. In the end, the pursuit of stability in an inherently unstable system may be the most control we can hope for.