Sumary of What’s at stake in the inflation debate? | Mark Weisbrot:
- Monetary policy is decided by the Federal Reserve, which sets short-term interest rates;
- and currently also directly influences long-term rates (including those paid on home mortgages).
- Over time, the Fed’s interest rate policy is the most important policy determining how much employment and unemployment we have.
- This is because of the effect of interest rates on economic activity – for example, note the recent boost that the housing market has gotten from low mortgage rates.
- But most importantly, the Fed has typically raised interest rates when it decided that unemployment had gotten “too low”, thereby setting a limit on how close we can get to full employment.
- The Fed actually caused most of the recessions that the US experienced since the second world war, by raising interest rates.
- His argument is directed at the size of both the expansionary fiscal and monetary policy – ie the Fed’s zero short-term interest rates plus money creation (“quantitative easing”), and the very large federal budget deficit.