Harvard macrofinance professor Robert Barro sees no good reasons for the recent sudden reversal of U.S. monetary policy normalization.

Laura Hermes

2019-09-09 20:38:00 Mon ET

Harvard macrofinance professor Robert Barro sees no good reasons for the recent sudden reversal of U.S. monetary policy normalization. As Federal Reserve Chair Jerome Powell yields to the persistent demands of a vocal president, the FOMC approves an interim interest rate cut by quarter point to 2%-2.25%. This rate cut represents a clear departure from the current business cycle of interest rate hikes in recent years. Barro advocates the Taylor monetary policy rule that the nominal interest rate should rise in response to higher inflation and economic output both relative to their targets. In accordance with the key Taylor monetary policy rule, the nominal interest rate normally tends toward a gradual long-term equilibrium path.

In this light, Barro regards the recent interest rate reduction as a special deviation from the prior path of U.S. monetary policy normalization. Federal Reserve Chair Jerome Powell seems to justify the recent interest rate cut in terms of the fact that U.S. inflation remains low and tame as the economy operates near full employment despite continual trade escalation between the U.S. and China. Barro indicates the clear and present danger that the recent rate reduction represents a dovish Powell response to many stock market analysts and the Trump administration.

 


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