In his Wall Street Journal editorial headlined “Fed Policy is a Drag on the Economy” this morning, Stanford economist John Taylor makes the remarkable claim that the US Federal Reserve’s efforts to keep interest rates down by asset purchases now—and promises of asset purchases in the future—is like rent control. If this were true, then the Fed’s actions to lower interest rates could be contractionary and could cause another recession. But it is just wrong.
The Fed’s actions to lower interest rates are more like encouraging the construction of more apartments—by granting building permits more readily—in an effort to keep rents down. That makes all the difference. The Fed’s actions are stimulative because the Fed is acting within the framework of supply and demand bringing markets to equilibrium. While the Fed is intervening in asset markets, contrary to Taylor’s claim, it is not doing anything to take away the role of interest rates to equate supply and demand. So when the Fed brings interest rates down, people will build more houses and factories, and buy more machines and consumer durables than they otherwise would.
Miles Kimball’s blog features a more extensive criticism of John Taylor’s claims about monetary policy. We welcome your comments at firstname.lastname@example.org.