by Mickey D. Levy
e21 – Economic Policies for the 21st Century
April 10, 2014
Economic performance continues to improve and in most regards has moved close to normal, but the Federal Reserve’s monetary policy remains far from normal. As the Fed tapers its asset purchases, it relies on forward guidance as a vehicle for artificially suppressing real interest rates even though the economy is in its fifth consecutive year of expansion and unemployment is declining. The Fed seems to have lost sight of what normal monetary policy should be, and the historic pitfalls of excessive focus on short-term conditions and monetary fine-tuning. As the economy and labor markets approach capacity, the need to artificially suppress real rates—and forward guidance—dissipates. There is now a strong rationale for the Fed to acknowledge its limitations, change the thrust of its forward guidance away from signaling sustained monetary stimulus far into the future and establish a transparent strategy to more quickly achieve monetary policy normalcy.