Fixed interest rates

Why can’t the Fed or any central bank announce and stick to a fixed short-term rate (e.g. 3%) forever and ever? No more guessing where the Fed is going, no more market gyrations based on the “bankers’ banker.”

Congress can screw up fiscal policy or get it right, and actual treasury rates will still vary because of that, or attractiveness compared to other countries, or business cycle, etc. Just so everyone in the market knows where the Fed stands, at all times.

Apologies if this is the wrong forum, but it’s tenuously related to “macroecomony”.

What happens if there’s deflation or hyperinflation?

We would have had a depression if rates were forced to be at 3% the last 4 years.

If we have a deflation, money velocity will slow.

There will be no hyperinflation - “inflation is everywhere and always a monetary phenomenon.” If Fed doesn’t print money, hyperinflation is not possible.

If rates were wlays 3%, we would also have had a much smaller bubble - investors would not have reached for yield and lenders couldn’t have afforded to lend at 4% APR for 30 years. Sure, we would have less homebuying activity, but also less foreclosures - sort of the average state of things since 1950s. No bubble, no pop, no attempt by Fed to reinflate the punctured balloon.

In deflation, money velocity is ALREADY slow…

Smart guy, eh?

I meant “deflation = slow velocity of money”.

Read what I meant, not what I wrote :stuck_out_tongue:

I think you’re failing to take account the polictical aspect of all this. Let’s say we did have 3% interest rates forever, and slowly but surely, unemployment was ticking up. You don’t think some politician would try and strongarm the Fed into taking some sort of action? I mean, they only have a limited amount of tools to use, which includes controlling the money supply and lowering/raising the discount rate.

Works great in the textbooks.

Tell me for example then. If we do face a deflationary situation, as you noted, with VoM slowing down, why on earth would you keep interest rates stable?

Friedman was talking about the extension of credit. At perpetually low rates, money would flow too easily and inflation would become uncontained.

If you want to go for the most predictable policy - that would be the gold standard. Slower growth but no inlfationary concerns.

I don’t see how you can argue that if there is deflation, money velocity slows (or is the cause of the deflation), but that there can’t be inflation because you aren’t printing money. Either you allow velocity to interact with money printing in your explanation, or you don’t.

Secondly, how are you going to keep interest rates always at 3%, you’re going to be printing money sometimes and you’re going to be contracting the money supply sometimes.

It sounds like your models aren’t holding together logically.

The challenge with the gold standard is that you will have deflation as productivity improves. Deflation will then make equity investment unattractive except at extremely high costs of capital. That will reduce innovation and productivity, which will help reflate (slowly) but impede productive improvements.

I don’t like to actually have to think on Fridays so I won’t go into the real gold standard debate. But, I’d essentially argue that you don’t experience deflation as much as your money no longer loses value. When currency has real value, a little increase in growth goes a long way.

I hate typing long detailed posts, but there is much more to deflation than simply a function of the quantity of money…deflation is driven by contraction in liquidity - apetite for risk as Minsky puts it…OP, you need to think a little bit more through different scenarios and you’ll soon see the mistakes…

Oh, Macroeconomic theory in this thread, huh?