The Fed’s Error

Many observers have called for the FOMC to tighten monetary policy by raising interest rates in the near term. But such a course would create profound economic risks for the US economy. Why would a near-term tightening of monetary policy be so problematic? Because given the prevailing economic conditions, higher interest rates would push the economy away from the FOMC’s economic goals, not toward them.

On the contrary. If the Fed’s target inflation rate for satisfying its statutorily imposed mandate of price stability is 2%, inflation rate is and has been since the Panic of 2008 substantially lower, and Fed-suppressed interest rates are artificially low—in the zero-to-not-much-more range—and have been over substantially the same time frame and longer, then the thing to do is to raise interest rates allow interest rates to float to levels historically consistent with an inflation rate of 2%.

After all, rising interest rates is intrinsically inflationary, and the Fed has (quite properly IMNSHO) said 2% inflation is the stable price inflation, not substantially less than 2%.

Continued interference in the free market, whether by the elected government or by the Federal Reserve Bank, is not just ineffective, it’s actively counterproductive.

Leave a Reply

Your email address will not be published. Required fields are marked *