In a recent post Krugman writes:
I know that there are economists for whom it’s always 1978, who are constantly fearing — or, I suspect, in their innermost selves, hoping — for a return of the good old days when inflation was a constant threat. But in the world we’ve been living in this past quarter-century or more, inflation expectations haven’t moved much, and nominal interest rates have, in practice, been a pretty good guide to the stance of monetary policy.
As the charts indicate, falling and low rates in 2001-03 did not stop nominal spending undershooting the trend level. In that sense, monetary policy was tight (and tightening). It was only when “forward guidance” was introduced that spending reversed, i.e., monetary policy became expansionary despite rates remaining constant. Conversely, rising rates after mid-2004 would be inappropriately characterized as restrictive monetary policy actions. On the contrary, they can be thought as defensive moves required by the higher real rates associated with growing confidence in the economy and the resulting strength in private spending.
The goal of such actions is not to raise the level of interest rates, but to maintain the desired rate of money growth.
The next charts indicate that at present, despite the maintenance of “zero” rates, monetary policy is still tight since spending remains far below trend and is not moving in the right direction. QE1 and its successors was mostly a palliative!