“Last week the Federal Reserve chose not to raise interest rates. It was the right decision. In fact, I’m among the economists wondering why we’re even thinking about raising rates right now.
“But the financial industry’s response may explain what’s going on. You see, the Fed talks a lot to bankers — and bankers reacted to its decision with sheer, unadulterated rage. For those trying to understand the political economy of monetary policy, it was an “Aha!” moment. Suddenly, a lot of what has been puzzling about the discussion makes sense: just follow the money.
“The basic principles of interest rate policy are fairly simple, and go back more than a century to the Swedish economist Knut Wicksell. He argued that central banks like the Fed or the European Central Bank should set rates at their “natural” level, defined in terms of what happens to inflation. If rates are too low, inflation will accelerate; if rates are too high, inflation will fall and perhaps turn into deflation.”
Read the full New York Times Op-Ed by Paul Krugman here.