Diamond News

The Federal Reserve began raising the level of short-term interest rates at the end of 2015. The central bank’s latest Monetary Policy Report[1], published on Friday in advance of Chairman Jerome Powell’s semiannual testimony to Congress this week[2], suggests this may have been a mistake. According to the report, the proper level of short-term interest rates today could be as low as 0%.

To be clear, nobody knows the “right” level of short-term interest rates that balances the competing priorities of growth, price stability, and financial stability. Central bankers are trying to set policy on the basis of a “constantly changing number [that] is affected by the saving and spending decisions of people all over the world,” as I put it in my column[3] this past weekend.

The inherent impossibility of the challenge has not prevented economists from coming up with “rules” to guide monetary policy makers. Without rules, the thinking goes, officials will succumb to political pressure and make mistakes.

Back in the 1960s, Milton Friedman argued[4] the Fed should “be instructed to keep the stock of money growing at a fixed rate, ⅓ of 1% per month,” but this simple rule failed to account for changes in what counted as “money” and what that meant for spending and saving behavior. By the mid-1980s, Friedman’s prescription had become totally useless.

In 1993, Stanford University economist John Taylor devised a formula[5] for setting short-term interest rates based on an estimate of the “neutral” interest rate[6], the gap between actual inflation and the inflation target, and some measure of whether the economy is weak or strong, such as the distance between the level of gross domestic product...

Read more from our friends at Gold & Silver

Pin It

Diamond Buyers Club

twitter facebook 

Follow us on Twitter and Facebook

Contact Us

+1 (832) 736-2772

PO Box 5613 
Katy, TX, USA