Does the Federal Reserve know what it is doing? The answer is no. Furthermore, can the Federal Reserve know what it is doing? The answer is also no.
This is not because the officers of the Fed are not intelligent. They are indeed brilliant. It is because of the inherent unknowability at the heart of the Fed’s decisions. The central bank cannot possibly make much more of a guess about the complex and recursive factors at play in the world’s financial systems and economies.
That inherent inability to know what it is doing, combined with the central bank’s vast power, make the Fed the most financially dangerous institution in the world. However good the central bank’s intentions might be, its actions manipulate the world’s dominant fiat currency based on the debatable theories and guesses of a committee of economists. That can create disastrous financial instability. Since that is true, how can anybody think the Fed should be an independent power? That is a puzzle indeed.
The real results of discretionary central banking are sharply different from the hopes expressed at the time of the Fed’s founding in the early 1900s. William G. McAdoo, who was then secretary of the Treasury and also chairman of the Federal Reserve Board, proclaimed that the Federal Reserve banks “will give such stability to the banking business that the extreme fluctuations in interest rates and available credits which have characterized banking in the past will be destroyed permanently.”