If there is one thing the history of the Fed has taught us, is that every boom eventually results in a painful bust.
That, however, is not the way Janet Yellen sees things. The former Fed chairman, who last June said she doesn’t believe that “we will see another crisis in our lifetime”, urged the Fed to commit to a new approach to forward guidance, one which would let economic booms run long enough to fully offset crashes like the global financial crisis, recommending that the Fed make “lower-for-longer” its official motto for interest rates following serious downturns.
Of course, by doing so, the Fed also ensures that the subsequent crash would be far more serious, but Yellen’s “strategy” is cunning: all the Fed would have to do is blow an even larger bubble as a result, guaranteeing an even greater wealth transfer during the next “recovery.”
What Yellen’s “new” approach boils down to is basically for the Fed to let the economy overheat, and let inflation run rampant as a result of looser monetary policy while shunning concerns about financial stability risks, even after a decade of low rates.
Of course, her logic presented in typical academic central banker fashion was far more simplistic: elaborating on how the central bank should think about what to do not if but when rates have to be cut to zero again in the future and can’t go any lower, she said the Fed should promise now that it will keep rates low enough to let a hot economy make up for lost time.
“By keeping interest rates unusually low after the zero lower bound no longer binds, the lower-for-longer approach promises, in effect, to allow the economy to boom,” Yellen said her most extensive remarks about monetary policy since leaving the Fed early in the year delivered at a Brookings Institution conference. “The (Federal Open Market Committee) needs to make a credible statement endorsing such an approach, ideally before the next downturn.”
