Are We Doing Monetary Policy All Wrong?
Regarding “The Fed Risks Appearing Political” (Business & Finance, Jan. 26): The Federal Reserve’s political appearance is small potatoes compared with how it attacks the economy’s problems with the wrong tools. The Fed attacks inflation and too-low interest rates infrequently with a sledgehammer when it should attack frequently with a scalpel.
The economy is like a giant ocean liner. It should be managed with slight moves from persistent, well-timed tugboat nudges. The chart of the federal-funds rate shows instead how the Fed works, with huge moves interspersed with long, silent periods. That’s no way to guide our glorious ocean liner.
Instead of infrequent 25-, 50-, and even 75-basis-point moves, which cause big disruptions to money flows and investment decisions by investors and corporations, the Fed should use five- or 10-basis-point moves frequently. The result would be a graph much different than the precipitous ups and downs we suffer through.
Ideally, we would have a slowly undulating curve always between 3% and 4%, a relatively narrow range, with a cycle of 10 or 20 years, not the two- or three-year cycle we currently endure. After a few weeks of minor basis-point moves, the market would get the drift. Rates in the bond market would adjust, lending would adjust and the stock market would make calm, less-frantic moves. All of these adjustments would be small. Planning could be a lot more rational.
