Ultra-Low Rates and Extra-High Inequality

By Karen Petrou

On March 12, the Financial Times ran one of Martin Wolf’s insightful columns, this one focusing on a critical facet of post-crisis monetary policy – ultra-low interest rates – to see why so much monetary-policy firepower had had such minimal macroeconomic impact.  Mr. Wolf suspects that the secular stagnation first framed by Lawrence Summers means that ultra-low real rates are here to stay due in part to economic inequality.  However, what if ultra-low rates on their own exacerbate inequality and thus create a negative feedback loop with dangerous implications not only for long-term growth and financial stability, but also for inequality?  Considerable evidence shows that ultra-low rates are inextricably intertwined with extra-high inequality.  Fed thinking on the new neutral rate thus must prick the traditional neo-Keynesian bubble to ensure that Chairman Powell’s new normalization isn’t a path to still worse inequality. Continue reading “Ultra-Low Rates and Extra-High Inequality”

The Mysterious Case of the Misfiring Monetary Policy

By Karen Shaw Petrou

When former Fed Chairman Bernanke launched a new approach to U.S. monetary policy earlier this year, he prompted many within and outside the U.S. central bank to call for sweeping change that would solve the “mystery” Janet Yellen says bedevils post-crisis monetary-policy transmission.  Just like the blue carbuncle Sherlock Holmes eventually found inside a large goose, central bankers are searching for a new gemstone within reams of data by which to guide increasingly complex policy-transmission channels.  Continue reading “The Mysterious Case of the Misfiring Monetary Policy”