Saturday, October 11, 2014
"Premature normalization" the big policy mistake
The biggest policy mistake that central bankers do not nat to make is "premature normalization", the action of starting to raise rates to end the QE cycle before it is appopriate. No one wants to commit the original sin of the Great Depression when monetary policy was too tight. We must always remember the apology to Milton Friedman from Ben Bernanke. Any Fed proxy not commit the action of being too tight. The forward commitment is that the Fed will always err on the side of too loose. All expectations have to be filtered through this bias. There has been nothing to change this view.
The hallmark of monetary policy since 2008 is the premise that the Fed will not make the premature normalization mistake.