Time to Raise Rates?

Last week, Josh Brown brought up the issue of the Federal Reserve raising interest rates. With QE2 around the corner, it doesn’t look like the Fed will, but I think Josh has a good case.

Here’s a look at the Fed Funds rate against trailing four-quarter nominal GDP:

The two lines tack each other well. The hotly debated point is the middle of last decade when nominal GDP indicted that rates were too low. Other commentators said this as well, and more sophisticated measures like the Taylor Rule agreed.

Lately, however, nominal GDP growth has climbed to over 4% while interest rates are still stuck at 0%. Should this be discounted since it’s only making up for the slack caused by negative growth? Or is the Fed again behind the curve?

Posted by on October 29th, 2010 at 2:05 pm

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