The Fed’s Latest Move Shows Why the System Must Change

Originally published on Substack. 

Every time the Federal [Reserve] Open Market Committee (FOMC) meets, the commentary fixates on a familiar question:

Will interest rates go up, go down, or stay the same?

What if that debate misses the forest for the trees?
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The Fed’s recent decision and meeting minutes—covered by the Wall Street Journal and CNBC—reveal something far more consequential: policymakers are increasingly boxed in by the structure of the system itself.

Inflation is still a concern. Financial instability is still a concern. Federal debt from overspending is an enormous concern. And the Fed is expected to help manage all of it at once.

That tension is not accidental. It is the predictable outcome of central banking.

Does America Need a Central Bank?

The United States has never been comfortable with central banking. For good reason.

The First Bank of the United States (1791–1811) was controversial from the start, opposed by luminaries like Thomas Jefferson and others who feared concentrated financial power. Congress ultimately allowed its charter to expire.

The Second Bank of the United States (1816–1836) followed the same path, dismantled after Andrew Jackson warned—correctly—that central banks entrench privilege, socialize losses, and distort markets.

For much of the 19th century, America had no central bank. Economic growth was uneven, yes—but long-run prosperity was remarkable, innovation flourished, and financial discipline was enforced more by market forces than committees.

The modern Federal Reserve arose not from a clear market failure, but from political reactions to earlier government mistakes.

The 1907 financial panic, often cited as justification for the Fed, was worsened by bad banking laws and restrictions on branch banking that made the system fragile. Instead of fixing those distortions, Congress passed the Federal Reserve Act of 1913—the same year the dreaded federal income tax was enacted.

That costly pairing was likely no accident. The modern fiscal–monetary system was seemingly built deliberately.

A Central Bank That Is “Independent” in Name Only

The Federal Reserve is frequently described as independent or quasi-private. In reality, it is a government-created institution with monopoly power over printing money.

Congress sets its mandate.

Fed controls the monetary base.

Fed manipulates interest rates.

While private banks fund the Federal Reserve System through fees and assessments, those costs are passed on to consumers and businesses. Americans pay for the central bank whether they approve of its actions or not.

Meanwhile, the Fed has been running hundreds of billions of dollars in operating losses, driven by interest paid on reserves and the consequences of its flawed balance-sheet expansion.

This is not a market-tested institution. It is a politically protected one.

The Mandates—and the One That Really Counts

Officially, the Fed operates under a dual mandate: price stability and maximum employment. In practice, there is a third mandate that dominates policy decisions:

Keep federal debt service manageable.

Before the 2008 Great Financial Crisis, the Fed’s balance sheet hovered around $800 billion or 6% of GDP. After GFC and COVID-era interventions, it surged to $9 trillion or 35% of GDP, and remains near $6.5 trillion or 21% of GDP.

This persistence has little to do with inflation being “conquered.” It has everything to do with the reality that allowing interest rates to fully reflect risk would dramatically increase federal borrowing costs. The Fed suppresses yields, absorbs Treasury issuance, and calls it stability.

That is fiscal dominance, not sound monetary policy.

Why Central Banking Creates Cycles—and Inequality

Central banks promise stability. What they deliver is systematic distortion.
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New money enters the economy unevenly—flowing first into financial markets, asset prices, and large institutions. Wages, savings, and fixed incomes adjust last. That Cantillon dynamic fuels asset bubbles, raises housing costs, and widens the gap between large firms and small businesses.

​These outcomes are not accidental. They are baked into discretionary monetary policy.

From the Great Depression to the Great Inflation, from the housing bubble to the post-COVID inflation surge, the Fed has presided over repeated boom-bust cycles.

A robust, resilient economy is not compatible with a system that tries to centrally plan it.

A Serious Reform Path—Starting Now

For those of us who believe in free markets, the long-term goal should be clear: a competitive, free-banking system where money and credit are disciplined by people in markets, not managed by non-elected members of the FOMC.

Ending the Federal Reserve should be on the list of priorities when genuine free-market reformers are in office.

But we don’t get there overnight.

Until then, the Fed must be constrained as tightly as possible. That means:

1. Return the Fed to its original intent of a narrow lender-of-last-resort, not a permanent allocator of credit or backstop for federal deficits.
2. Sell off the vast majority of its $6.5 trillion balance sheet, including mortgage-backed securities and excess Treasury holdings.
3. Impose a strict monetary rule: cap the Fed’s balance sheet at no more than 6% of GDP, roughly where it stood before 2008.
4. Once that cap is reached, the balance sheet should keep going toward zero unless it is necessary to not with a superiority vote. The cap should remain 6% of GDP with a continued decline by capping any growth to population growth plus inflation which typically grows slower than GDP until it is zero and end the Fed.

This approach restores predictability, limits political abuse, and begins reintroducing market discipline into money and credit. This should be paired with a strict spending limit on Congress.

This dual monetary-fiscal rules of limiting any growth to population growth plus inflation will help improve the situation.

The focus must be on reducing the Fed’s balance sheet with an single rule of price stability and federal government spending to a lower share of GDP, possibly 6% for both, then limiting to population growth plus inflation thereafter.

The Bottom Line

Central banking in the United States did not arise from market failure. It arose from political convenience—and it has been used ever since to paper over fiscal excess.

If we want lasting prosperity, rising wages, and real opportunity, we need to stop pretending that smarter central planners can fix what central planning itself breaks.

Sound money, fiscal restraint, clear rules, and ultimately freer banking are not radical ideas. They are the foundations of a free and prosperous society.

That’s how we truly let people prosper.