Let's get something in perspective: A rate-based monetary policy...

  1. 8,214 Posts.
    Let's get something in perspective:
    A rate-based monetary policy is that it is primarily a tool for the management of liquidity premiums and the cost of liquidity. Because the Fed does not issue liabilities to the public it can not be a direct setting of risk-free rates.
    Interest rates have essentially zero effect on the level of domestic capital formation. Theories of low-interest-incentivized over-/mal-investment are fantasies unsupported by data and completely null and void. The causation runs the other way.
    Interest rates are a function of domestic investment which is a function of the domestic output gap, growth expectations, and the global output gap and broad trade-weighted REER.
    After or during recessions, accommodative monetary policy serves to compress liquidity premiums. Accommodative fiscal policy serves to stabilize AD and growth expectations. Corporate sector stabilizes as underutilized productive capital is disinvested or changes in ownership.
    As underutilized productive capital becomes increasingly hard to acquire by firms with demand to accommodate production expansions, new capital is formed through fixed investment. Only then do interest rates react as a response.
    Sorry for offering no new theory, just re-instating the old one.

    As for the Fed and expected Trump appointees: unqualified/lesser qualified members would vastly increase the risk of a policy mistake, increasing the length & thickness of forward expected outcome distribution tails. As a result, all risk asset prices would be affected negatively. Which increases recession risk.

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