Long-time readers of this blog will not be surprised that I do not like the Federal Reserve Board’s new policy of keeping interest near zero, and effectively printing money (though its program of buying $85 million a month of mortgage-backed securities and long-term Treasury securities) until unemployment falls to 6.5% or less, as long as inflation stays below 2.5%. (The Fed said it would continue its program as long as inflation stayed within ½% of its 2% target. 2% + ½% = 2½%.)
One of the problems with the Fed’s policy is that, by the time inflation gets to the top of the range, it’s too late to stop it from going higher. To stop inflation from going up nine months from now, you have to act now. If you wait until inflation hits the limit, it’s too late to stop it from going over the limit.
When I see the Fed doing things like this, and justifying them like this, I realize how much we miss Milton Friedman. He would have been able to explain clearly and simply why what the Fed is doing is wrong. And we need that.
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