Anatole Kaletsky — Why the Fed Buried Monetarism

The US Federal Reserve’s decision to delay an increase in interest rates should have come as no surprise to anyone who has been paying attention to Fed Chair Janet Yellen’s comments. The Fed’s decision merely confirmed that it is not indifferent to international financial stress, and that its risk-management approach remains strongly biased in favor of “lower for longer.” So why did the markets and media behave as if the Fed’s action (or, more precisely, inaction) was unexpected?

What really shocked the markets was not the Fed’s decision to maintain zero interest rates for a few more months, but the statement that accompanied it. The Fed revealed that it was entirely unconcerned about the risks of higher inflation and was eager to push unemployment below what most economists regard as its “natural” rate of around 5%.

It is this relationship – between inflation and unemployment – that lies at the heart of all controversies about monetary policy and central banking. And almost all modern economic models, including those used by the Fed, are based on the monetarist theory of interest rates pioneered by Milton Friedman in his 1967 presidential address to the American Economic Association.

Project Syndicate
Why the Fed Buried Monetarism
Anatole Kaletsky | Chief Economist and Co-Chairman of Gavekal Dragonomics and a former columnist at the Times of London, the International New York Times and the Financial Times

ht MoveThroughit in the comments

Still dealing with Milton' Friedman's contemporary reading of Hume. However, this paper argues that David Hume's views on this subject were more liberal on inflation then Friedman's.