Our turtle-like Fed

Fed meetings occur every six to seven weeks and the Fed Funds target is adjusted in quarter-point increments (25 basis points). In the past I have argued that this procedure is inefficient.

I am not in favor of interest rate targeting. But if the Fed continues to insist on that policy tool, I have proposed adjusting rates much more often. One idea I’ve discussed is that the Fed Funds target is adjusted daily, to the nearest basis point. Instead of long periods of virtually no change, interrupted by abrupt changes, the price would move up and down based on new information, such as a market price. I have proposed that the rate could be set each day based on the average vote of the FOMC.

Today Financial times gives a good indication of why I think this approach makes more sense:

U.S. Treasury yields tumbled on the back of employment data, as investors flocked to the safety of Treasuries and bet that the Federal Reserve – which held rates steady on Wednesday – will be forced to respond to a weakening economy with rapid cuts to government spending. financing costs.

The US ten-year yield fell by 0.18 percentage points to 3.79 percent, the lowest level since December. Investors now expect the Fed to cut borrowing costs by a full percentage point by the end of the year, implying the Fed will have to make an additional large half-point cut at one of its three remaining meetings.

“The Fed rolled the dice again on Wednesday and they were proven wrong,” said Steven Blitz, chief US economist at TS Lombard.

Friday’s jobs data “does not indicate a recession, but the Fed must take action, and a 0.5 percentage point cut in September is now firmly on the table.” They could even move earlier, before the meeting,” he added.

Instead of ‘rolling the dice’ with an outdated nineteenth century model, where bankers might have arrived in town after a long journey on horseback, how about a 21st century policy regime, where policy moves quickly and smoothly adjusts as new information comes in.

The Fed is unlikely to accept my proposal. But I suspect right now Jay Powell is privately wishing it were in order. It’s an unusually long seven weeks until the next meeting. A lot can happen in seven weeks.

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