Bank Directors Seminar, Coeur d'Alene, ID

Traditional view of monetary policy (a Keynesian view) – Conventional wisdom is that lower interest rates will encourage borrowing, expand spending, and thus stimulate economic growth. – The experience of the last 8 or so years should encourage us to rethink this chain, as the economy has not expanded robustly as suggested by this model. – Failures of this model are not confined to the U.S., but Europe and Japan are showing equal evidence of contrary evidence. – What is wrong with the conventional thinking? – Hein-sight: There is an unintended consequence of low interest rates that most ignore and that is that savers are penalized. Those that are trying to build net worth have a harder time doing so from saving. Unfortunately, that was the sense of most in the economy after the financial crisis. Continued low interest rates just encourage savers to take on more risk then, with no reason to expect enhanced returns. How can this be good? U.S. Monetary Policy: An Interest Rate Perspective – In my view, the excessively easy monetary policy from 2008-2016 was not very effective in stimulating demand for goods and services. – It is more effective in stimulating demand for financial assets, i.e. bonds and stocks, and even real estate and commodity prices. – In my thinking, as long as the Federal Reserve is targeting interest rates to be less than they are targeting inflation (meaning they are targeting negative “real interest rates). – It is better to think that the Federal Reserve has “lightened up on the accelerating” as opposed to it “has put its foot on the brakes.” – While the Fed has recently increased the target for the federal funds rate, the policy still meets my definition of easy. – Use inflation as the benchmark against which to judge the level of interest rates