The “emptiness” of the Fed´s monetary policy

Dean Baker writes: “As talk grows of a June interest rate increase, where’s the data to support it?”:

Weak data had convinced many that the Federal Reserve was unlikely to raise interest rates in June, but in recent days multiple Fed policymakers have suggested that an increase should be on the table in the near future. What’s unclear is why.

Little new data have emerged to suggest that the economy is much better than it was six or nine months ago. Since interest rates were raised in December, in fact, the pace of economic improvement has slowed almost to a stall.

All that´s true, but Dean shouldn´t be surprised because the monetary strategy in place has absolutely nothing to do with the underlying economy, being guided only and exclusively by what they call “Gradual Normalization” (of interest rates, obviously).

And “gradual” cannot mean just once a year, but at least a couple of times. Remember that early this year the sages thought four times was a “good definition of gradual”!

Update: In addition to “empty” the Fed´s strategy (program) is infeasible because there´s a loop that doesn´t allow it to “terminate”:

 [market-strengthening -> Fed tightening talk -> market weakening -> Fed backing off -> market strengthening -> Fed tightening talk -> … ]

And a loop that needs breaking in order to achieve sustainable and stable growth – by a shift away from inflation targeting and towards nominal income growth targeting.

3 thoughts on “The “emptiness” of the Fed´s monetary policy

  1. I wish they would normalize IOR (0% for the first 95 years). If they’d do that, they’d actually have a chance to raise the Fed funds rate over time.

      • Great analogy. I’m coming to the conclusion that we need to be writing our Congressmen to outlaw all IOR. It’s a tool that has only been abused and misused by the Fed. Maybe I’ll start a petition on change.org too.

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