The Fed as a Moral Enterprise

At two o’clock in the afternoon of the final meeting day of the Federal Open Market Committee (FOMC) of the Federal Reserve, one will find tens of thousands of traders and investment managers glued to their computer screens, waiting for the moment when a two-hundred-to three-hundred-word summary of the meeting will be published. Every word will be parsed for special meaning. For these professionals a lot is riding on the outcome. The stock and bond markets are likely to react one way if the tone of the statement is “hawkish” and implies a tightening of money supply and credit terms, and in another if the decision is “dovish” or accommodative, suggesting monetary and credit easing. The dovish statements benefit certain types of asset classes and groups of investors, the hawkish others. This two-hundred-word FOMC statement can and often does move markets by hundreds of billions and even trillions of dollars. Winners—the traders and managers whose actions appropriately anticipated the direction of the FOMC—stand to benefit enormously, while losers go down in defeat.¹

However, what is going on in these FOMC meetings involves far more than determining market winners and losers. The FOMC statement has a bearing on almost every aspect of commercial and private life. And yet, very few people outside the professionals mentioned above realize what is at stake; most don’t know what the FOMC is or what the Federal Reserve actually does, and have only a vague sense about issues of interest rate and banking policy. For better or worse, the discussion of such matters is for the most part now mostly left to those who claim special expertise in macroeconomic theory.

Volumes have been written about the technical issues and the nuances of the Federal Reserve System and the FOMC monetary policy-making responsibility. I want to pay some attention to that analysis, as it provides the foundation required for even a rudimentary assessment of these entities. However, my interests ultimately move in another direction. I want to show that the making of U.S. monetary policy is inescapably a moral enterprise; thus an analysis of its implicit moral presumptions provides an important mode of evaluation of the FOMC decisions and the policy actions taken.

Without making the whole case here, I will argue that monetary policy making is a moral enterprise first off because it inherently involves distributional consequences, which by their very nature demand an accounting based on fairness and justice. Monetary policy involves moral issues at even a more fundamental level as the responsibility for the currency is bound up in duties and obligations associated with the social contract—duties that have to do with honoring contractarian promises. While couched in economic terms like “currency debasement” or “debt monetization,” criticisms here actually represent a moral charge that government promises are not being kept. I argue that these moral elements of monetary policy are obscured from view and given insufficient consideration for two reasons: first, they are embedded in interpretations and judgments involving formal economic constructs; and second, the econometric models used by policy makers in order to collect and interpret data, and thus to make forecasts that justify particular policies, actually function as a kind of “black box,” lending an aura of objectivity to judgments that actually reflect moral commitments. These models, not human judgment, are heavily relied upon to determine the probability and range of policy outcomes; this limits the proper consideration of consequences. I then try to construct the moral-reasoning framework of the current Fed based on its policy decision patterns, suggesting that it is a form of utilitarianism, and argue why it should be deemed inadequate to the important responsibilities of monetary policy making. Finally, I propose a modification of the current Fed approach of act utilitarianism relying on the practical-reasoning theories, not economic theories, of John Maynard Keynes, who did important work in probability theory.

Modifying the current approach using Keynes is just a start. As may become evident from the arguments presented, I associate myself with those who suggest that a...