Monetary policy is ineffective. Why? Let's make a quick analogy.
Problem: Tall truck is stuck under a low bridge...
Analysis: The problem is the top of the truck is pushing too hard against the bridge.
Solution: Take some air out of the tires.
The solution is not where the problem is. The Fed is trying to
maintain the height of the truck, yet the economy is notched down after
years of bubbles, like a low bridge. It is futile to expect the economy
to maintain its previous height. We must lower our expectations of the
economy itself, thereby lowering the truck. Then we will find that the
economy will be able to move.
The easy monetary policy is actually keeping the truck pushed up against the low bridge. The solution is to tighten monetary policy and raise the Fed rate. This will relieve pressure on the economy to over-perform, when it naturally is under-performing. The idea is to lower the economy into the range where it can move.
If labor share rises back up, we could re-inflate the tires of the truck.
Do you think the Fed should raise the IOR rate, the discount-window rate, or both? IOW, move the whole corridor, or just the top or bottom end?
Posted by: Steve Roth | 06/06/2013 at 05:24 PM