The Fed meets every six or seven weeks to adjust the target for the federal funds rate by 0.25 percentage points (25 basis points). I have argued before that this process is inefficient.
I do not support interest rate targeting. However, I have suggested that if the Fed is going to stick to its policy tools, it should adjust interest rates more frequently. One idea I have discussed is to adjust the target for the federal funds rate to the nearest basis point every day. Rather than long periods of little change punctuated by sudden changes, interest rates would rise and fall based on new information, including market prices. I have suggested that interest rates could be set daily at the median of FOMC votes.
Today’s Financial Times It nicely illustrates why I think this approach makes more sense.
Treasury yields fell sharply following the jobs data as investors flocked to safe haven government bonds and predicted the Federal Reserve, which kept interest rates unchanged on Wednesday, would be forced to sharply cut borrowing costs in response to the weakening economy.
The yield on the 10-year Treasury note fell 0.18 percentage point to 3.79%, the lowest since December. Investors now expect the Fed to cut borrowing costs by 1 percentage point by the end of the year, meaning the central bank would have to cut rates by a larger half-point at one of its three remaining meetings.
“The Fed took another gamble on Wednesday and was proven wrong,” said Stephen Blitz, chief U.S. economist at TS Lombard.
“Friday’s jobs report doesn’t mean a recession, but the Fed has to act,” he added. “A 0.5% rate cut in September is certainly on the table, and they could move sooner before the meeting.”
Instead of “rolling the dice” in an outdated 19th century model, where bankers arrive in town after a long journey on horseback, how about a 21st century policy regime in which policies are quickly and smoothly adjusted as new information comes in?
The Fed is unlikely to adopt my proposal, but I think Jay Powell is privately hoping that it will happen right now. We have an unusually long seven weeks until the next meeting. A lot can happen in seven weeks.
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