The Corner

Monetary Policy

Interest Rates and the Evidence of Things Unseen

Martin Hutchinson states the premise of his latest article on monetary issues with admirable clarity in his first sentence: “For the last twelve years, and to some extent for the last quarter-century, the United States has been living under a regime of artificially low interest rates.” All manner of economic ailments are said to follow from these artificially low rates. But have rates actually been artificially low for so long?

We would need to know what the neutral or natural interest rate was at various points in time to have a sense of the answer. The actual rate is artificially low or high only in comparison to an unobserved rate where the interest rate should be. One influential estimate of that rate put it at 0.6 percent in the second quarter of 2018—when the federal-funds rate was higher than that. The fed-funds rate was higher than this estimate for all of 2008 through 2010, too, since the estimated neutral rate during that period was negative. Using a “Taylor rule” instead to estimate the neutral rate, the federal-funds rate was higher than it for the same period; using a “modified Taylor rule,” it was higher from 2009 all the way through 2015.

Hutchinson thinks we put too little faith in markets when we “support a system under which an unaccountable central bank sets rates at the level it wants, without reference to market supply and demand.” I think what shows too little faith is the assumption that the central bank can keep interest rates very far from their market level for prolonged periods of time.

Ramesh Ponnuru is a senior editor for National Review, a columnist for Bloomberg Opinion, a visiting fellow at the American Enterprise Institute, and a senior fellow at the National Review Institute.

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