The Fed’s persistent and radical monetary policy of low interest rates and buying assets has driven financial assets, principally public bonds, into bubble territory and already affected their credibility. This, combined with fiscal uncertainty flowing from hostile tax and regulatory policies and the implication of unsustainable government spending and entitlement programs, has already created the circumstances where the risk discount on investments negates investment, although interest rates are below 0.25%.
The Federal Reserve should signal the politicians, by raising interest rates, that now is the time for them to react reforming fiscal and regulatory policies.
Antonio S. Grau
Boca Raton, Fla.
Even at inflation of 2% a year, money loses half its value in a generation—about 33 years. That isn’t stability, nor anything resembling it. That is stealth expropriation. Maybe Fed employees should have their compensation reduced by 2% for each year of the target rate.
Arthur O. Armstrong
Manhattan Beach, Calif.
Narayana Kocherlakota offers his assessment that monetary policy poses the biggest danger to the economy. While he may be correct, it is not for the reasons that he states: namely that higher interest rates will push the economy further away from its price and employment objectives.
Clearly, the Fed has essentially achieved its employment objective, but it is somewhat below its self-selected objective of 2% inflation. Congress clearly specified the inflation goal for the Fed by calling for “price stability.” Since 2012, the Fed has redefined this congressionally mandated goal of no or zero inflation as being represented by 2% inflation of the Consumer Expenditure Survey. In fact, 2% inflation will double the price level every 35 years. This hardly represents price stability.
Furthermore, by continuing to pursue a zero interest-rate policy, the Fed will inevitably engender serious imbalances in the economy by distorting investment incentives and spending decisions. These distorted incentives and eventual bubbles pose the biggest threat to the continuing growth and stability of the U.S. economy.
Mr. Heller is a former governor of the Federal Reserve System.
Mr. Kocherlakota adverts to the current inflation rate of 0.3% and later mentions the importance of real versus nominal interest rates. Accordingly, a 25 basis point rise in the fed-funds rate would still leave the real interest rate at less than zero. He indicates that government bond yields also indicate subdued inflation outlook. However, he fails to recognize that government bond yields haven’t been determined by market forces for well over five years. While the Fed has indeed stopped its QE purchase of bonds, the Fed still carries over $2.5 trillion of government bonds, not to mention $1.7 trillion of mortgage-backed securities on its bloated balance sheet. Government bond yields by any reasonable standard are administered rates and have been for several years.
Accordingly, we have completely lost the information content that market-based interest rates provide. We will only have market based interest rates when the fed funds rates are raised and when the Fed divests its bloated balance sheet.
Anthony O’Boyle Beirne
If a lender in the private market demands a real return of 3%, it makes no difference whether the whimsical inflation “target rate” is 2% or 20%—the creditor’s nominal rate will reflect risk and current inflation, adjusted for term, so that the real rate is hopefully constant.
Inasmuch as this has always been the case in a free market unhampered by central bank meddling, Mr. Kocherlakota’s contradictory statement that “if the public believes the Fed has lowered its inflation goal, all real interest rates in the U.S. will be higher” is shocking and is indicative of a Fed policy now totally removed from market reality.
Sugar Land, Texas
Mr. Kocherlakota doesn’t explain the benefits to Americans of a 2% inflation rate. It is true that everything the federal government owes becomes 2% less each year, and each payment is made with less valued dollars. And our citizens can buy a house with a loan, and every payment made thereafter is paid with a lower valued dollar. But every citizen in the U.S., who has 100 U.S. dollars in his pocket or in savings, has only $98 after the devaluation (inflation rate) sets in.
Mr. Kocherlakota or somebody should tell us: Besides profiting the federal government, who else in the U.S. benefits from inflation?