"The Fed was holding their target interest rate high while the natural rate was plunging."
The Fed is not supposed to be targeting interest rates. It's supposed to target inflation (or NGDP) the interest rate is an INSTRUMENT (and not its only one!). And, sure enough, they failed spectacularly to keep inflation up to target starting in late 2008.
Thanks for writing this, Kevin! This may sound weird but bear with me: I don’t know if you’re right about everything, but I’m grateful that you’re writing an alternative way of looking at this that is coherent and consistent. It helps us all remember that we don’t know everything and the conventional wisdom isn’t always right.
Thinking of natural interest rate as a function of the supply and demand for risk free deferred consumption is powerful, and I think rings very true.
"The Fed was holding their target interest rate high while the natural rate was plunging."
The Fed is not supposed to be targeting interest rates. It's supposed to target inflation (or NGDP) the interest rate is an INSTRUMENT (and not its only one!). And, sure enough, they failed spectacularly to keep inflation up to target starting in late 2008.
Thanks for writing this, Kevin! This may sound weird but bear with me: I don’t know if you’re right about everything, but I’m grateful that you’re writing an alternative way of looking at this that is coherent and consistent. It helps us all remember that we don’t know everything and the conventional wisdom isn’t always right.
Thinking of natural interest rate as a function of the supply and demand for risk free deferred consumption is powerful, and I think rings very true.
Thank you Andrew! I'm glad you find value in it.
What you wrote isn't weird at all. In fact, it's all that I could hope for.