16 - Minimizing regret: cognitive dissonance as an explanation of FOMC behavior

Summary

The case against discretionary monetary policy rests on two bases. One is technical: Monetary policy has long and variable lags, and forecasts are inaccurate. The second is that monetary policy is not made by a philosopher-king who efficiently uses all available information and always puts the public interest ahead of his own interest. Friedman argues that one need not attribute evil intent to Fed officials to conclude that they often put the Fed's self-interest ahead of the public interest.

I am not saying that people in the [Federal Reserve] system deliberately pursue these measures for these reasons. Not at all. … I am trying to analyze the forces at work, and not to describe the detailed motivation or personal behavior of the people involved. All of us know that what is good for us is good for the country. … We all know that what we are doing is important, that it performs a real and useful function. … I am not criticizing specific individuals. … I have often argued that the human species is distinguished from animals much more by its ability to rationalize than to reason.

(Friedman 1982, p. 116)

Nonetheless, many economists seem to interpret the monetarist's belief that the Fed does not wholeheartedly pursue the public interest as an attack on the integrity of Fed policy-makers. Many economists know these policy-makers personally and know them to be devoted public servants. Hence, they find any attack on the Fed's intentions entirely implausible.