Barron’s editorial page editor considers new Fed chair’s role

Thomas Donlan of Barron’s ponders in his latest editorial commentary the likely impact of Janet Yellen as the new “chair” of the Federal Reserve.

Yellen is widely taken to be an inflationist, more interested in the number of jobs in the economy than in the value of the money paid to the workers. This is normal for an academic economist and not so dangerous for a vice chairman who controls only one vote, but a Fed ruler who wants to try to control money and the economy dares not have an obvious ruling philosophy. …

… The advantage of a worldwide system of paper money is—or should be—that market participants observe national policies and adjust interest rates and exchange rates accordingly. Their role is to reward responsible policies that create value and punish foolish policies that destroy value. They do not need bureaucrats by any title to set interest rates and exchange rates.

The central bank should follow a simple rule, such as Milton Friedman’s advice to raise the money supply by a specific small amount every month, or John Taylor’s advice to respond to increased inflation by raising real interest rates proportionately.

Most central bankers, however, believe it is their job to manipulate markets with interest-rate policies supported by empty words. In the short term, they can fool speculators, but the truth will out, and the truth will create disillusionment and cynicism, leading eventually to disaster. In the case of the U.S., the short term has lasted for decades, but that does not mean that there is no such thing as disaster.

Experience teaches that the only way to stop central bankers from deceiving the markets is to make them stop talking.

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