When my twin brother and I were tots, our father convinced us that he could make a traffic light change from red to green whenever he wanted it to. Raising his hand to the light as we sat at an intersection, he would say, ‘I command you to change to green … now!’ cocking his finger at the light for emphasis. Sure enough, the light would change precisely on cue, while two little boys shouted, ‘Papa, how do you do that!?’
I share this little anecdote because I’m convinced that, if more people had been fooled the way my brother and I were, fewer would be so gullible today as to believe that the Fed has been firmly in control of interest rates these past eight years and that it is only owing to that control that rates have remained low for so long.
The view that the Fed might have raised interest rates long ago, had it only wanted to, became notorious during the presidential campaign when Donald Trump publicly accused Janet Yellen’s Fed of keeping rates low for political reasons. But Trump was merely embroidering a belief common among many (mostly conservative) Fed critics. Writing for Project Syndicate this June, Carmen Reinhart observed that ‘The US Federal Reserve led the charge among central banks … by relying on a near-zero policy rate … interest rates have been low, and remain low, because policymakers have gone to great lengths to keep them there.’ In a March 2015 Wall Street Journal op-ed, David Malpass attacked ‘The Fed’s belief that near-zero rates lead to growth.’ ‘Private sector dynamism,’ he noted, ‘thrives on market pricing, not artificially low rates.’ Similar opinions were expressed by several speakers at the Cato’s recent Annual Monetary Conference.
Indeed, the myth that interest rates have been held down by the Fed’s easy monetary policies has been given credence by Fed officials themselves. Their intent, to be sure, hasn’t been to fault the Fed. They’re merely loath to admit that rates haven’t been fully, or almost fully, under its control. Hence Yellen’s bland reply to Trump, that ‘partisan politics plays no role in our decisions about the appropriate stance of monetary policy.’ That, to a Fed bureaucrat, is safer than saying, ‘Keeping rates low? Why, we only wish we could raise them!’
This post was published at Mises Canada on DECEMBER 16, 2016.