Bad Math at the Fed --- Attack of the Inflation Hawks [View All]

[Donnachaidh]

http://www.counterpunch.org/2011/09/12/attack-of-the-inflation-hawks/

Last month the Federal Reserve Board’s Open Market Committee (FOMC) voted 7 to 3 to commit itself to keep its short-term interest rate at near zero for the next two years. Given the persistence and severity of the downturn, this was a modest step for the Fed to take to boost the economy.

There were several more aggressive actions that the Fed could have taken. For example, the Fed could have targeted a longer-term interest rate. This could mean something like setting a 1.0 percent interest rate target for five-year Treasury bonds over the next year. Such a policy could be expected to drive down borrowing costs throughout the economy. That would lead to more mortgage refinancing and some additional investment.

Lower interest rates would likely also lead to a somewhat lower value of the dollar. This would make imports more expensive and make our exports cheaper to people living in other countries. That should help to reduce our trade deficit, the most important imbalance facing the economy.

The Fed could have also been even more aggressive and followed a path suggested by Ben Bernanke for Japan’s central bank back when he was still a professor at Princeton. Bernanke recommended that Japan’s central bank deliberately target a higher inflation rate in the range of 3-4 percent. This would have the effect of reducing real interest rates when short-term nominal rates are already at zero. It would also reduce the burden of debtors.

More at the link --