Thank God for small blessings in the midst of madness!

In its first 2025 meeting, the Federal Reserve’s policy-making Open-Market Committee wisely left its target for short-term interest rates unchanged. This was not a surprise given that the most recent price index numbers remained above the Fed’s inflation target.

December job growth for the nation as a whole and for individual states was strong. Minnesota was one of two states in which unemployment actually fell, by 0.2 percentage points.

What remains discouraging, however, is that the financial media frame virtually every objective announcement of economic indicators in terms of its expected effects on decisions by the Federal Reserve, and by extension, U.S. securities markets. And markets react — often counterintuitively moving up on what objectively is bad news for Main Street, and down on good news.

Good grief.

The announcement of December’s CPI numbers two weeks ago evoked the following headlines:

• “Inflation report shocker upends Fed interest rate bets in 2025”

• “US inflation ticks up in December and remains above Fed’s 2% target rate”

“• Inflation rose to 5-month high in December. What that means for Fed rate cuts”

• “December inflation data puts future Fed cuts to bed”

In the minds of the media and the general public, the central bank has taken on the role of a super-agency with miraculous powers to solve myriad economic problems. It will somehow lower inflation, keep employment high and output growing regardless of what Congress and the executive branches do. External shocks from within our country, or from the rest of the world, will be addressed nimbly. Our central bank can micromanage a complex $23 trillion economy.

This all is madness.

Yes, healthy financial markets should reflect the decisions of central banks in the values of stocks, bonds and other securities. But that information should be only one factor among many and certainly not the dominant one. The underlying profitability and financial soundness of the companies or entities that have issued bonds, stocks or other financial instruments should be the key variable. That seems forgotten.

Back in the Kennedy-Johnson years of the 1960s, when the inflation-adjusted value of goods and services produced was growing at 5.8% a year, announcements of Fed monetary policy decisions would be buried in the business sections of major newspapers and ignored everywhere else. Hardly anyone could have named the chair of the Federal Reserve Board.

Back then, stock and bond markets focused on the real economy of providing goods and services, not on arcane financial instruments based on the value of other financial instruments.

Retirement funds existed along with mutual funds for consumer savings. But there were no multi-billion dollar funds holding only other speculative financial instruments. Most market activity was to fund businesses or government projects like roads. Investors, including insurance companies and retirement funds, balanced safety for capital against possible or real earnings. Earnings determined value and value determined price. Nothing was made up.

All that is gone. Trillions of dollars in securities now trade in opaque financial instruments in arcane markets. This supposedly will allocate capital and risk more efficiently, creating more wealth for all. And the Fed will swoop in to prevent any accidents from turning into catastrophes, while also ensuring that any bubbles get turned into “soft landings.” But growth of real GDP since 2000 barely hits 2.1% a year, versus 3.7% a year over the last 40 years of the 20th century, before most of this financial engineering.

What has gone wrong?

We have forgotten painfully learned lessons from the past. Some involved economy-wide risks in minimally regulated financial markets. Others reflected the unanticipated downsides of hubris in the belief that we can micromanage national economies and economic emergencies.

Two late economists, one academic and one pragmatic, helped us learn those lessons. The wisdom they and others gathered is increasingly forgotten

The academic economist was Milton Friedman, the 1976 Nobel laureate and parent of modern libertarianism. His core belief was that governments should take only minimal actions in economic activity. Moreover “money matters:” Friedman saw a nation’s money supply as key to maintaining an environment of stable prices within which private enterprise could produce goods and services to meet people’s needs.

Friedman had come of age professionally just as the ideas of the pragmatic one, John Maynard Keynes, were dominating economic policy. Keynes had argued for active government jockeying of money and interest rates on one hand and government taxing and spending on the other to both eliminate inflationary booms and deflationary busts with low output and employment.

Keynesianism became accepted doctrine in the late 1940s and persisted into the 1980s. But increasingly its results seemed to be stagflation, a counterintuitive combination of slow growth of output, high unemployment and simultaneous high inflation that hit all major industrialized nations. Friedman apparently had been right. By the late 1970s, U.S. economic growth was slow, unemployment high and inflation at unprecedented peacetime levels.

U.S. President Jimmy Carter seemed as unable to solve this dilemma as did the leaders in the United Kingdom, France, Germany and other industrialized nations.

But, after a disastrous period with a business CEO heading the Fed, Carter had the guts to appoint Paul Volcker as board chair.

Volcker was not a theorist like Friedman. He was a supreme pragmatist who accepted Friedman’s core ideas. Volcker had a master’s degree in economics from Harvard and split his career between the Federal Reserve, private Wall Street banking and the U.S. Treasury. Having served in a key Treasury position for Republican Richard Nixon, Democrat Carter called him back in 1979 to chair the Federal Reserve’s Board of Governors.

Volcker’s appointment that August was in a time of economic and political crisis. The CPI was 12% higher than a year earlier. The annualized July to August increase was 35%.

An applied Friedmanite, Volcker understood that excess growth of the money supply was the root cause of this near-hyperinflation. He knew that the Fed cannot solve all economic woes. It can, however, maintain a stable value for our currency.

Fed’s policy makers went along as Volcker planted his size-15 shoe firmly on the money-creation brake pedal. The prime rate, the interest rate charged on loans to businesses with good credit, already was at a record high of 11.5%, reflecting inflation. But Volcker’s tight money drove it up to 19% eight months later and, after a brief dip, to 21.5% at the end of 1980. Treasury Bonds offered interest above 15% for 30 years.

There was no soft landing. Output fell. Unemployment rose, topping out at 10.8% in late 1982, the highest level since the Great Depression. Nor did inflation magically disappear. The CPI still increased by an annual average of 4.2% over the eight years Ronald Reagan was in the White House including a period at 4.4% in the last year of his term. But sane monetary policy carried out in full realization of its limitations combined with the sane fiscal policies of the George H.W. Bush and Bill Clinton administrations made the 1990s the strongest and most sustainable decade since the 1960s.

After 2000, all that got progress thrown away in a series of tax cuts and crises in poorly-regulated financial markets. With taxing and spending decisions paralyzed in a newly hyper-partisan Congress, the Fed became the only game in town. All the lessons, theoretical and practical, that economists had learned in the last quarter of the 20th century were tossed.

Which brings us to today, where financial markets, bloated with trillions in opaque funds, yo-yo in reaction to any announced indicator of the real economy, all based on what the Fed will do with the money supply and interest rates.

We are back to 1975 with the risks squared. Our elected branches of government are a grotesque parody of the remarkable coherence we had 50 years ago, when bipartisanship was so common that Cabinet secretaries, Supreme Court justices and Federal Reserve governors were often confirmed on simple voice votes. But that’s as much about politics as it is economics.

The inevitable crisis in federal finances with unsustainable budget deficits and national debt looms large and we have no operative means of dealing with it.

St. Paul economist and writer Edward Lotterman can be reached at stpaul@edlotterman.com.