Fed funds rate: is it just right?

I read the book, " 21st Century Monetary Policy: The Federal Reserve from the Great Inflation to COVID-19," by Ben S. Bernanke. All METARs know that Nobel Prize-winner Bernanke served as the 14th chairman of the Federal Reserve from 2006 to 2014, making hugely influential monetary decisions during the Great Financial Crisis.

The entire book covered the many tweaks the Fed used to try to execute its mandate of enhancing price stability and full employment. Dr. Bernanke seems to feel that the Fed has done a pretty darn good job.

Since the rather mild 2001 recession the Fed has raised and cut the fed funds rate in a roller coaster way. At the first sign of an economic problem the Fed has cut real yields to negative and held them long past the end of the emergency. This has led to bubbles and misallocation of resources. Before 2000, the fed funds real yield was about 2%.

A case can be made that the fed funds rate is just about right at this time. This means that the Fed doesn’t need to cut in the near future. Even when signs of recession begin to appear (since the business cycle hasn’t been repealed) the policy of cutting the fed funds rate to zero should be left in the dust bin of history. (Barring a true emergency or crisis and even then only temporary.)


Why the Fed Is Right to Bide Its Time on Rate Moves

Not that critics of Jerome Powell’s latest move don’t have some good points

By James Mackintosh, The Wall Street Journal, Updated May 6, 2024

[Fed Chair] Powell thinks interest rates are restrictive, that they are slowing the economy and thus should be contributing to reducing inflation. The problem is there is also lots of evidence that they are not…

An economy beset with problems shouldn’t have the S&P 500 stock index trading at just 2.4% below its all-time high. It shouldn’t have implied volatility, as measured by the Cboe Volatility Index, or VIX, at boom-time levels of 14. And it shouldn’t have junk bonds paying around the smallest amount of extra yield above safe Treasurys of the past 30 years…

But, for now, enough consumers and big businesses are thriving, and demand could stay robust and perhaps push inflation higher. I can see why the Fed wants to wait and see how these conflicting pressures play out before deciding if it needs to raise or cut rates. [end quote]

The stock and bond markets always want rate cuts. Isn’t free money peachy-keen?

I think the Fed should hang tight. When the FOMC makes a move they should move gradually instead of the plunge to zero of the past 20 years.



We are in an inflationary high GDP growth period. We need taxation on the high end and corporate to balance with interest rates to head off inflation.

Taxation creates GDP growth.