At top of the Fed, a dispute on policy picks up steam
This CNBC article outlines a debate at the Fed over an appropriate neutral interest rate and target rate for inflation. The idea that there is significant noise in the processes that generate inflation is certainly right. It is not realistic for the Fed to expect to manage the rate of inflation to exactly 2%. But, that limitation calls the effectiveness of Fed policies into large question. The Fed can't distinguish a case where some noise has temporarily pushed inflation above 2% from the one where excessive inflation has become established in the economy. In the latter case, the Fed would be behind the curve. Its efforts to bring inflation back under control would have a large probability of causing some kind of disruption in the economy.
The better way to pursue monetary policy would be to find a neutral interest rate that gave private enterprise room to control inflation through the collective activity of businesses and markets. The Fed's goal would be to enable the availability of the amount of credit that private enterprise was able to use productively.
Some variation in interest rates would result from variations in the demand for credit from private enterprise. The goal would be for the cyclical average interest rate to be the target interest rate. The goal also would be to keep this process close enough to some kind of equilibrium to allow the Fed to adjust the amount of credit availability slowly enough not to be any kind of disruptive force for private enterprise.
In the good case, this kind of Fed policy would be enough to enable private enterprise to realize the full productive potential of the American economy. But, if private enterprise is not up to this task at a normal neutral interest rate, very low interest rates are not going to make it do better. A better choice would be to take up the slack with government spending. The limit on that spending is the
inflation it could produce. When that inflation is not a problem, there is no reason why the Fed could not hold a substantial share of the bonds needed to finance a government deficit.
