On monetary policy and the Fed as a fiscal agent

Monetary policy is complicated, so maybe I’m missing something, but here’s my foray into the melee:

Following a link to an FT blog post titled “Asymmetry in monetary policy“, I was startled to find that the post was about the asymmetric risks of a double-dip recession and not about the asymmetry of monetary policy through the last decade.  It seems to me that we should admit that when the Fed reduces rates to a level below 2% for a prolonged period of time, monetary policy is being used where fiscal policy is more appropriate — the Fed is stimulating the economy because of a failure of government (update: or maybe that should be regulation).  Extremely low interest rates are dangerous because of the costs they impose on savers and their tendency to encourage, not healthy investment — which should be viable if financed near 2% — but the development of assets with hidden leverage (and decent nominal returns).

I agree with Thomas Hoenig.  The Fed should raise rates to 1% sooner rather than later.  The stock market will fall on the news, some mismanaged banks may need to be put through resolution and the economy will probably struggle.  To address the real consequences of the policy, Congress needs to pass a strong fiscal program of additional support.  But it’s time to acknowledge that supporting the real economy by destabilizing the financial sector is simply not good policy.


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