The Wall Street Journal describes the views of Judy Shelton, one of the names mentioned for a position on the Fed’s Board of Governors:
She wrote critically in the weeks before that election about how the Fed’s low- rate policies were boosting wealthy investors and corporations at the expense of working Americans and retirees with fixed incomes.
On Tuesday, Ms. Shelton said she is no longer concerned about such perils because she believes the administration’s fiscal policies have boosted growth and productivity.
“Things have changed,” Ms. Shelton said in an interview with The Wall Street Journal, reconciling her earlier views with Mr. Trump’s current call for lower rates. She pointed to Mr. Trump’s tax and regulatory policies that she said have boosted growth without raising inflation as an example of a much-needed tool for supporting economic growth.
Higher economic growth is generally associated with higher interest rates, so I’m not sure I follow this argument. This sort of reasoning seems extremely discretionary, and not in a good way. I favor a rules-based approach to monetary policy. Yes, “things have changed”, but in a direction calling for higher interest rates.
This also caught my eye:
If nominated and confirmed, Ms. Shelton said her main objective would be to scrap the way the Fed currently implements its monetary policy decisions. “What bothers me most about the way the Federal Reserve currently operates is more the mechanism,” she said. “We can talk about whether rates should go up or down,” she said. “I would like to see more market-determined rates.”
That’s also my view. Shelton has suggested the possibility of returning to a gold standard, which would allow for the market determination of interest rates. I favor targeting NGDP futures prices rather than gold, and letting the market set interest rates.
Fed officials agreed in January to abandon the old way of managing the federal-funds rate, which means that paying interest on reserves will be a permanent feature of implementing policy decisions.
Ms. Shelton said she objects to such payments because they are higher than consumers are able to earn on their own deposits.
I also believe that the payment of interest on reserves was a mistake, albeit for different reasons.
READER COMMENTS
Greg Jaxon
May 22 2019 at 7:54pm
I understood such a “linkage” to be between commodity prices and interest rates, although the one may lead or lag the other by many months. Is the correlation to economic growth (rate?) even better?
I agree that discretionary central planning is bound to go wrong for many reasons of fallibility, politics, corruption, or simple ignorance of the actual ever-changing world. Per force, rule-based central planning is calculated to go wrong very quickly. Rules must be made by players of the game and enforced by endogenous economic forces (of coercion, or resource expenditure). As with any force of nature an automatic rule shall be turned to do work for the players who study it carefully enough to exploit it.
Indeed, the only free-market salvation is actual free individual discretion, not any central monetary plan. The international gold standard and its commercial paper clearinghouses engaged a wide swathe of players deeply involved in the economic facts on the ground, with many professional players determining where credit (especially short term clearing credit) could be safely injected so as to self-liquidate as the inspected transactions closed.
Discount and interest rates set by lo these many players in the money market are only “rule-based” in the much broader sense that the rules of equity will apply and the rules of human and physical nature will be considered by the many fully vested parties that then determine the “money&credit supply”.
Scott Sumner
May 22 2019 at 8:55pm
Greg, I worry that the gold standard would not work well in the modern world, for a variety of reasons. The biggest problem is the highly unstable international gold market.
Greg Jaxon
May 23 2019 at 3:53am
Scott, what is the disqualifying instability?
The gold market is the size of a median nation’s; the spread on spot gold is the narrowest (most liquid) of any “commodity”, and usually just 8-10x wider than T-bills, which can be shipped for that fraction of the cost of shipping gold.
There is no real instability in the stock of gold, whereas the stock of government issued paper can and has suffered severe shocks.
In any case, the gold itself is only the foundation for the structure of gold standard money.
Scott Sumner
May 23 2019 at 3:57pm
Greg, The value of gold (relative to other goods and services) is highly unstable. Under a gold standard the price level would be unstable.
Greg Jaxon
May 23 2019 at 10:34pm
Scott, There are two problems with your answer.
You have used the floating exchange rate between dollars and gold to predict “prices” under a gold standard. But prices in dollars for goods produced by incurring dollar debts (supplies, labor, capex, …) need to be stable in dollars in order to service those debts. You have not offered any reason to suppose that prices under a gold standard with gold bills, gold bonds, and business debt principal and interest payable in gold would not be analogously “stable” in gold and “unstable” when converted to dollars by the exchange ratio.
You assume that price stability is absolutely good, when our whole system of economic signalling depends upon the information carrying capacity of changing prices. Utterly constant prices for everything would leave us with only the discount rates on future goods to carry the market coordination signals.
I’m sure you mean “stable” in the sense of being a noise-free channel for the daily nuances of price signalling. If so, why do you think the discount and interest rates are not “prices” subject to the same economic concern (coordinating the relationship between present and future wealth and/or income)? Why would you want monetary policy noise to be injected in this channel? Don’t you recall the whining about declining “forward visibility” once the Fed was stirred by the financial crisis? When the interest rate price channel is destabilized, the capital devoted to business planning in compromised or destroyed.
Scott Sumner
May 25 2019 at 4:54pm
Greg, I agree that price stability is not the right criterion. Rather NGDP instability is the real problem. But NGDP would also be unstable under a gold standard, and that would be a big problem.
Thaomas
May 23 2019 at 7:17am
I think that the Fed should reduce ST interest rates or take some other measure that they believe will cause inflation to increase until some announced target level of prices has been achieved. I think this is the only way to persuade markets that the Fed has committed itself to a symmetric inflation target. Alternatively (if it wants to change over to a NGDP targeting commitment) they might reduce rates or take some other measure they think will increase nominal GDP until some announced GDP level has been achieved in order to persuade markets that it does have an NGDP target.
Greg Jaxon
May 23 2019 at 10:09pm
Why?
What fundamental benefit is achieved by “persuad[ing] markets that the Fed has” commandeered macro statistic X, Y, or Z? Is there a propensity to be controlled by political appointees that is otherwise unmet by modern society?
Comments are closed.