Cato: Fed Inflation “Needed” to Counter “Irrational Exuberance”

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In To Prevent Bubbles, Restrain the Fed, Cato’s Gerald P. O’Driscoll Jr. writes, in an article otherwise opposed to policies that cause “the boom and bust cycle”:

“At first Fed easing was in order. The central bank needed to counter the “irrational exuberance” of the dot-com bubble. And by May of 2000 the Fed had done that by raising the fed-funds target to 6.5%. That needed to come down when the bubble burst. Aggressive cutting brought it to 2% in November 2001. The problem is the rate remained at 2% or less for three years (for a year it was at 1%).”

So, it’s okay to have artificially low interest rates when it’s “needed”–but not for too long! Ah, there’s the rub–finding just the right length of time to “ease”… we’ll get it right someday, I’m sure.

2:39 pm on November 17, 2008