The U.S. Federal Reserve should commit to letting economic booms run on enough to fully offset collapses like the 2007 to 2009 Great Recession, former Fed chair Janet Yellen said on Friday, urging the central bank to make “lower-for-longer” its official motto for interest rates following serious downturns.
Elaborating on how the central bank should think about what to do if rates have to be cut to zero again in the future and can’t go any lower, she said the Fed should promise now that it will keep rates low enough to let a hot economy make up for lost time.
“By keeping interest rates unusually low after the zero lower bound no longer binds, the lower-for-longer approach promises, in effect, to allow the economy to boom,” Yellen said in remarks delivered at a Brookings Institution conference. “The (Federal Open Market Committee) needs to make a credible statement endorsing such an approach, ideally before the next downturn.”
What We Are Doing Already
The official policy is what we are doing already. May as well make a policy out of it.
The caveat, of course, is the Fed does not realize what it's already doing.
There is one more major flaw. It's ass Backward. We have major busts because the Fed blew major bubbles.
The dotcom bubble arose when Fed Chairman Alan Greenspan held interest rates too low, too long with irrational fears of a Y2K disaster.
The housing bubble was a direct result of Greenspan holding rates too low, too long in the wake of dotcom and 911 disaster.
The everything bubble, which we are in now, was co-authored by Ben Bernanke and Janet Yellen. They held interest rates too low, too long in the wake of the housing bubble crash.
Seemingly Modest Proposal
Rather than blowing bubbles of increasing magnitude over time, why don't we try sound policies?
Of course, that's easier said than done. Greenspan did not recognize the dotcom bubble. Bernanke famously denied there was a housing bubble.
End the Fed
Ultimately, the only way to arrive at sound policy is to take the economic reins away from Fed charlatans.
We need to end the Fed and fractional reserve lending as well.
Mike "Mish" Shedlock