Why now is a good time to rethink monetary policy

Since the beginning of the pandemic, concerns have been raised about the Federal Reserve’s approach to handling economic challenges.

While the Fed’s perceived political involvement has garnered attention, the more pressing issue at hand is the way it tackles inflation and interest rates using what some describe as a sledgehammer when a scalpel might be more appropriate.

Instead of implementing infrequent and substantial moves of 25, 50, or even 75 basis points, which can disrupt financial markets and investment strategies, the argument put forth is that the Fed should opt for smaller, more frequent adjustments of five or ten basis points.

The goal is to create a smoother economic landscape, as opposed to the sharp and unpredictable fluctuations that are currently experienced.

FILE PHOTO: A Wall St. sign is seen outside the New York Stock Exchange (NYSE) in the financial district in New York City, U.S.

Rate curve

The proposed ideal scenario envisions a gradual and controlled interest rate curve, consistently hovering between 3% and 4%, within a relatively narrow range.

This approach would entail a longer-term cycle, spanning 10 or 20 years, rather than the shorter two- or three-year cycles witnessed today.

By implementing minor basis-point adjustments over a few weeks, financial markets, lending practices, and the stock market would adapt in a more measured manner.

These adjustments would be small, fostering a more rational and predictable economic environment conducive to better planning.

The debate over the Fed’s approach to monetary policy is ongoing, and while the central bank continues to grapple with economic challenges, alternative strategies like the one proposed here could reshape the way it addresses these issues in the future.