Respected professors Thomas Cooley and Peter Rupert join Brancaleone´s army and write:
A Fed Call to Arms?
Given that the labor market now seems reliably recovered and GDP growth is steadily positive it seems to be time for Fed to put aside its fear of the consequences and restore normalcy to monetary policy. It is important not only because of the dangers of waiting too long but also because of the hidden costs of the current policy. Keeping the Federal Funds rate at zero for an extended period has distorted economic decisions and financial markets as investors search for yield and seem to take on more risk. It has also arguably increased income inequality precisely because of the wealth effect the policy was designed to create. Moving back to a normal monetary policy need not be disruptive and should enhance the Fed’s credibility going forward. The graph below shows the Federal Funds rate implied by the Fed’s earlier announced goal of a 6.5% unemployment rate. While everyone realizes that is not the current goal it illustrates the case for a return to conventional monetary policy.
Who decided that “normal” monetary policy is synonymous with (significantly) positive interest rate?
(Note: The term Armata Brancaleone is still used today in Italian to define a group of badly assembled and useless people)