Stuck in the slow lane

It is a wonder that people who write about interest rate policy don’t bother to actually read what they have written. This is from All eyes on Yellen interest rate dilemma in today’s AFR.

When US Federal Reserve chair Janet Yellen speaks at the Fed’s annual Jackson Hole central banking conference on Friday, investors and economists will want to know how low she thinks interest rates should be set in this brave new world of lacklustre economic growth, weak productivity and soft inflation.

All this with interest rates as low as possible. Whatever low rates have or have not done, they most clearly have not set the economy on fire. So we then have this three paras later:

Policymakers worry that with rates stuck not far above zero in the US, at record lows in Australia and in negative territory in Europe and Japan, central bankers will have little firepower up their sleeves to stimulate the economy in a future economic downturn or crisis.

It was once understood that low interest rates actually cause an economy to stall. And even if you didn’t know this, you think that someone might just begin to consider that low rates do not provide much “firepower” at all. I would actually go further and argue that low interest rates make the economy perform far worse than it otherwise would.

It’s like public spending. If you don’t understand the economic dynamic, increased spending, like lower rates, sounds just like what the economy needs. Both make things worse, but who is ever going to go through the pain of adjustment that cutting spending and raising rates would require? Since no one will, it’s hard to see a genuine recovery any time soon.

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