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For More Prosperity the Fed Needs a Price Rule

It’s not much of an oversimplification to say that on monetary policy, a major difference between the left and the right is that WE want a rules-based monetary policy, and the left wants the Fed to make up the rules as they go along. That’s been the Jerome Powell approach and with prices up just under 20% in just over three years, how is that working out for us?

CTUP co-founder Steve Forbes and our friend Judy Shelton have argued for a gold standard. Others of us have called for holding an index of commodities constant, or some such price rule. That is what Paul Volcker used in the early 1980s to conquer a decade of inflation.

A must-read piece in the WSJ by Jeff Yass of Susquehanna Capital argues that the “make it up as you go along” strategy only creates arbitrage opportunities for speculators and lowers growth by as much as one-half percent per year. That seems high to us but even if he’s only half right – this means an announced rule that the Fed abides by will provide a stable value dollar and reduce investment risk, which would make America a lot richer over time.

Economists generally assume the equity risk premium—or the amount of extra money you can expect to make for bearing risk—is about 25 basis points per volatility point. A 10% increase in volatility increases the expected return or cost of capital by 2.5%. That’s one of the unintended consequences of the Fed’s interfering in the market—without which we could expect much lower volatility. Higher cost of capital means less investment, which results in fewer goods and services that the world needs.”

Let’s hope the next Fed chairman adopts this strategy.

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