Yes, The Fed Really Is Holding Down Interest Rates

The very sluggish recovery of the economy since the financial crisis — despite zero and near zero interest rates — presents the dominant school of New Keynesian macroeconomists with a conundrum. Many have attempted to resolve the riddle by arguing that such unprecedentedly low interest rates are not the doing of the Fed and therefore do not indicate an expansionary monetary policy. Although not formally a New Keynesian, George Selgin has taken up and vigorously defended this position. According to Selgin, the view that interest rates have been “held down” by “the Fed’s easy money policies” is based on a “myth.” “The unvarnished truth,” according to Selgin, “is that interest rates have been low since the last months of 2008, not because the Fed has deliberately kept them so, but in large part owing to its misguided attempt, back in 2008, to keep them from falling in the first place.” Indeed, in Selgin’s view, the Fed’s monetary policy actually has been “too tight” since 2008.

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