Free The Fed From Its Wall Street Captors—A Monetary Roadmap For RFK

There is no way under the sun that negative real interest rates are a sustainable or rational monetary policy. And most especially when the central bank pins interest rates below the running inflation rate not just for a few months or quarters but for years on end.

Moreover, the Fed’s present-day addiction to negative real rates is not remotely supportable by macroeconomic analysis or betterment of the main street economy. Instead, it reflects the fact that the nation’s all-powerful central bank has been captured lock, stock and barrel by Wall Street.

The truth is, government should never deeply and persistently subsidize debt on behalf of either Wall Street or main street. Yet that’s what the Fed’s rate repression policies actually do—even though artificially cheap debt can only lead to false prosperity in the economy as a whole and to a fatal addiction to living beyond their means among household, business, government and financial borrowers alike.

As it happens, this perverse Fed policy has been in effect for more than two decades now. And here is the smoking gun. To wit, the inflation-adjusted interest rate on the Fed’s basic policy tool—the Fed funds rate—has been pegged at negative levels during 175 of the last 187 months. That’s 94% of the time since 2008.

So we are not talking about some kind of emergency expedient or even a once in a blue moon monetary experiment. No, the deeply and persistently negative rates depicted in the graph below have been the deliberate, institutionalized policy of the Fed, with no slippage between the cup-and-the-lip, either.

That is, these are the fully administered interest rates ordered by the FOMC (Federal Open Market Committee) at its monthly meetings year after year. And the calculation depicted below is based on subtracting the trailing 12-month change in the 16% trimmed mean CPI from the Fed funds rate for the current month. This version of the CPI is the most stable measure of the running inflation trend available, and it was known fully to the 12 members of the nation’s monetary politburo when they chose to peg the nominal Fed funds rate at each meeting.

In short, this economic insanity was the calculated handiwork of the FOMC. On this evidence alone, the FOMC should be stripped of its powers and put out to pasture forthwith.