My letter to the NY Times re: Why the Fed is perplexed about interest rates

Re: Fed Appears to Hesitate on Raising Interest Rates

Dear Sirs:
Austrian School economists are not at all perplexed about what to do with interest rates, because our understanding of economics and especially monetary policy is superior to that of the Keynesian School economists, who rule not only the Fed but all the central banks of the world. We understand that money is a medium of exchange and that interest rates are the result of the interplay of supply and demand for loanable funds. Demand for funds is determined by the expected profit to be realized by the various stages of the structure of production. The supply of loanable funds is determined by the desire of the public to consume in the present vs. save for the future, what we Austrians call time preference. An honest interest rate guides entrepreneurs as to the availability of real resources for the likely successful completion of their projects. The Keynesians at the Fed believe that they can put the cart before the horse; i.e., arbitrarily set an interest rate that will direct capital to a sustainable structure of production. No, it’s the other way around! Furthermore, given the Fed’s underlying confusion about such basic principles, it is not surprising that no matter how it believes the economy is doing, it will keep interest rates low at all times. Either it sees the economy as weak and needing lower interest rates, or it sees the economy as doing well with low interest rates and fears the result of raising them. It is especially maddening to see the Fed denigrating falling prices and expanding the money supply in an attempt to drive prices higher. Not only is the Fed’s policy contrary to the best interests of the people, for whom lower prices mean a higher standard of living, but such a policy is the path to runaway inflation in the future.
Patrick Barron
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