Smith Faculty Opinion Article
The 30 Seconds Outlook
March 15, 2011
“When I use a word," Humpty Dumpty said in rather a scornful tone, "it
means just what I choose it to mean - neither more nor less.”
- Lewis Carroll, in Alice, 1832-1898
In his February 28, testimony to Sen. Toomey on the Senate Banking Committee,
the Fed’s Bernanke appears to have difficulty responding to questions about the
Fed’s use of policy rules:
First, Bernanke states that the Taylor Rule calls for interest rates “way
below zero,” and this justifies methods such as quantitative easing. False,
Professor Taylor has long reported that his policy rule does not call for
interest rates below zero.
Second, Toomey asks if Taylor believes his rule calls for interest rates
below zero. Bernanke doesn’t answer directly, but states that Taylor’s 1993
policy rule provides a much different rate than his 1999 rule. False, Taylor did
not say he preferred different policy rules in 1993 and 1999, and provided
references.
The implications of these unusual claims about the Taylor Rule make it all
the more clear that the Fed should again be required to report its policy rules
for monetary policy and to report any deviations from these rules to Congress.
Reading between the lines, Bernanke does not use policy rules, but he tries
to makes it appear otherwise by arguing the Taylor Rule has changed---and is now
consistent with quantitative easing and interest rates below zero.
John A. Haslem
