Fed’s Plan to De-Mystify Interest Rate Intentions Won’t Induce Recovery

Here’s a letter I sent to the Wall Street Journal:

In “Fed Will Detail Rate Plans, Easing Market Guesswork” (Jan. 4), Mr. Hilsenrath and Ms. Di Leo claim that the Fed, by letting markets know in advance of its plans to keep short term interest rates low through 2013 and early 2014, could induce recovery. Removing market uncertainty about short-term rates will drop long-term rates, thereby “spurring investment and spending.”

They neglect to mention that long-term rates have already been at historical lows since 2008, yet we remain in an economic rut.

Artificially low interest rates are actively harmful. They reduce the only true source of credit and the only true driver of productive long-term investment—savings. They distort business’ decision-making and redirect precious capital away from where it is needed most.

Recovery will remain elusive until the central bank realizes that its policies disrupt the means to the end it seeks.

Matthew Melchiorre
Competitive Enterprise Institute