TRUST THE EXPERTS? CENTRAL BANKS ARE PEOPLE TOO!
By Laurence Pak
In mainstream media 🕵🏻♀️ you often hear about how the government can respond to any problems you have in the economy, whether it is unemployment, fiscal policy, trade deficits, inflation or anything else that make it sound like the end is near.
IMPER-FED-TION
If you've studied AP Macroeconomics (perhaps via the AP tutoring offered by Hong Kong Econ Tutor 😁), you've probably heard of the Federal Reserve 🏛 the Central Bank of the United States 🇺🇸 AKA The Fed.
The Fed is described as the “lender of the last resort”, and its regular “Federal Open Market Committee” (FOMC) 🥱 meeting, which has the power to set the interest rate in the US (specifically the Fed Funds rate 📈 which is the rate a bank charges any other banks for an overnight loan), and in turn also influences the rates in many other countries.
After every Fed meeting, they release a “dot plot” diagram showing the expecting changes 🎯 of the Fed rate in the next 12 months. The Fed first released the dot plot in 2012 as part of an effort to become more “transparent” around its decision-making process.
Jerome Powell, Chairman of the United States Federal Reserve and world renowned recession sprinkler.
Fun Fact: Experts are human. Humans are not omniscient. Except for Hong Kong Econ Tutor. Our tutors are 100% experts at exam prep, but for everything else we are just mere humans.
🍭 Yay! The Dot Plot! 🦄
However, according to Forbes: The dot plot’s ability to forecast the fed funds rate one year in advance is only about 50% over the last 10 years!
Every time you see anyone talk about the Fed, they try to make it sound like it’s a sacred entity that must be protected at all costs - especially from Presidential interference. 😠 The “independence” of the Fed must never be questioned! 😆
This link shows a diagram 📊 of the Fed’s complete incompetence in predicting economic growth. Way off from reality!
HARDLY-EVEN-REACTIONARY
The textbook understanding of the Fed 🏛 is that it is as an 'independent' organization with the power to react to the economy to make sure inflation is kept in check through the fine tuning of monetary policy. However, in reality its ability to predict the trend of the economy is just as bad as anyone else. It's called Public Choice Theory! Central bankers aren't 🧠 perfectly intelligent 😇 angels. They have incentives and bounded rationality like everybody else.
The Fed doesn't just respond to the economy. Its power to control the money supply and influence the interest rate affects everything to do with money, including inflation, the stock and bond markets, and the currency rates both in the United States and around the world (recall the Hong Kong Dollar is pegged to the United States Dollar) meaning that the Fed's actions directly impact the Hong Kong economy. 🇭🇰
Its completely wrong to think the government only responds to the problems in the economy. Through many departments and agencies, the government actively participates and influences the economy. The Fed controls the money supply 💵 and sets the interest rate 📉 therefore its policy directly affects the outcome such as 🎢 inflation. Because its ability to predict the future is as inaccurate as anyone else, its power and authority should and must be questioned. 👀
About Laurence Pak
Laurence Pak served as Director of Operations at the Lion Rock Institute, a prominent free-market think tank in Hong Kong, from 2015 to 2019. During this time, he published over 50 articles in major Hong Kong newspapers, including the Hong Kong Economic Journal.