Open AccessThe Perversity Of 2004-2005 Federal Reserve Policy
Author(s) -
Michael H. Cosgrove,
Daniel L. Marsh
Publication year - 2011
Publication title -
journal of business and economics research
Language(s) - English
Resource type - Journals
eISSN - 2157-8893
pISSN - 1542-4448
DOI - 10.19030/jber.v4i8.3326
Subject(s) - economics , interest rate , pace , argument (complex analysis) , rational expectations , unintended consequences , incentive , monetary economics , monetary policy , microeconomics , macroeconomics , law , political science , biochemistry , chemistry , geodesy , geography
The current policy stance of the Federal Reserve System to signal that it will continue to raise interest rates at a measured pace creates perverse incentives for agents with rational expectations. The knowledge that interest rates will rise in the future at a known rate implies that current demand for real assets purchased on credit will be higher relative to what demand would be in the absence of that knowledge. Policy effects are perverse in the sense that the usual intent of raising interest rates is to slow demand for real assets, not to increase it. The current froth in housing markets observed by Fed Chairman Greenspan may be an unintended outcome of this policy. A rational expectations theory is presented to back up this argument.