Low Interest Rates Aren't "Easy" Money

A blog about business and economics.
June 29 2012 9:45 AM

Low Interest Rates Aren't "Easy" Money

1340977550594

The St. Louis Federal Reserve Bank's FRED and ALFRED databases are some of the most impressive things happening in the public sector today. Unfortunately the president of the St. Louis Fed, James Bullard, has also recently become a really problematic actor in American monetary policy. Yesterday, amid America's fourth consecutive year of low inflation and high unemployment, he delivered a talk on the theme "U.S. Monetary Policy: Still Appropriate" that not only misdiagnosed the current situation, but mischaracterized what current U.S. monetary policy is by saying, "[T]he current stance of monetary policy is ultra-easy, and remains appropriately calibrated given the macroeconomic situation in the U.S."

The fallacy of identifying current monetary policy as "easy" or even "ultra-easy" is based on the confusion of thinking that low interest rates are evidence of easy money rather than a tool that central banks sometimes use to create a situation of easy money.

Advertisement

But the claim is quite easily refuted by considering two episodes from American history, the Great Depression of the 1930s and the Great Inflation of the 1970s. Interest rates were quite a bit higher in the '70s than they were in the '30s. But in the '70s inflation was high and rising, whereas in the '30s we had deflation. So do we really want to say that the greatest inflationary episode of the 20th century happened despite tight money, and the greatest deflationary episode of the 20th century happened despite easy money? Words are tools, and we can use them that way if we want, but it's an extremely confusing way to talk. Easy—or dare I call it "ultra-easy"—monetary policy is the kind of monetary policy that leads to inflation, whereas tight monetary policy is the kind of monetary policy that leads to deflation.

Today we don't have inflation like the 1970s, so it must be the case that monetary policy isn't as easy as it was back then. Not even close. But interest rates are much, much lower than they were in the '70s, which just goes to show that while rates are a tool central banks use, they're not a good indicator of the stance of policy.

The circumstances that face us in 2012 are considerably brighter than those of 80 years ago. Unemployment is at 8.2 percent and slowly falling rather than at 20 percent and rising. Inflation is running between 1 and 2 percent rather than below zero. But broadly speaking it's a similar situation to the situation of the 1930s. Unemployment has been persistently higher than at any time in the postwar period, and inflation has been not just lower than in the 1970s, but lower than it was in the 1980s or 1990s as well. The central bank has chosen to put a priority on maintaining an unusually low level of inflation by guaranteeing a low level of resource utilization. And what's particularly disturbing is that some of the people with power over this choice don't seem to understand what they're doing.

Matthew Yglesias is the executive editor of Vox and author of The Rent Is Too Damn High.

TODAY IN SLATE

Doublex

Crying Rape

False rape accusations exist, and they are a serious problem.

Scotland Is Just the Beginning. Expect More Political Earthquakes in Europe.

Why Men Can Never Remember Anything

The XX Factor
Sept. 19 2014 1:11 PM Why Men Can Never Remember Anything

The Music Industry Is Ignoring Some of the Best Black Women Singing R&B

How Will You Carry Around Your Huge New iPhone? Apple Pants!

Medical Examiner

The Most Terrifying Thing About Ebola 

The disease threatens humanity by preying on humanity.

Television

The Other Huxtable Effect

Thirty years ago, The Cosby Show gave us one of TV’s great feminists.

There’s a Way to Keep Ex-Cons Out of Prison That Pays for Itself. Why Don’t More States Use It?

No, New York Times, Shonda Rhimes Is Not an “Angry Black Woman” 

Brow Beat
Sept. 19 2014 1:39 PM Shonda Rhimes Is Not an “Angry Black Woman,” New York Times. Neither Are Her Characters.
Behold
Sept. 19 2014 11:33 AM An Up-Close Look at the U.S.–Mexico Border
  News & Politics
Foreigners
Sept. 19 2014 1:56 PM Scotland’s Attack on the Status Quo Expect more political earthquakes across Europe.
  Business
Moneybox
Sept. 19 2014 12:09 PM How Accelerators Have Changed Startup Funding
  Life
Inside Higher Ed
Sept. 19 2014 1:34 PM Empty Seats, Fewer Donors? College football isn’t attracting the audience it used to.
  Double X
The XX Factor
Sept. 19 2014 1:11 PM Why Men Never Remember Anything
  Slate Plus
Slate Picks
Sept. 19 2014 12:00 PM What Happened at Slate This Week? The Slatest editor tells us to read well-informed skepticism, media criticism, and more.
  Arts
Movies
Sept. 19 2014 2:06 PM The Guest and Fort Bliss How do we tell the stories of soldiers returning home from war?
  Technology
Future Tense
Sept. 19 2014 12:38 PM Forward, March! Nine leading climate scientists urge you to attend the People’s Climate March.
  Health & Science
Medical Examiner
Sept. 19 2014 12:13 PM The Most Terrifying Thing About Ebola  The disease threatens humanity by preying on humanity.
  Sports
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.