For this morning’s column, I want you to engage in a little thought experiment. Based on the e-mails readers have sent, many of you figure the Dec. 15-16 Federal Open Market Committee meeting is a no-brainer and that the central bank will raise its benchmark interest rate. Well, let’s put that thesis to the test. To do so, I am making you, dear reader, the chairman of the Federal Reserve. The setup for our barely hypothetical scenario is as follows:
Imagine (it’s not that hard to do!) that a huge financial crisis and economic collapse has occurred. The historical response to a crisis like this has been a combination of fiscal and monetary stimulus to replace the decline in household and private-sector demand. But this time, political gridlock and ideological foolishness made the usual fiscal response impossible. That left monetary policy — mostly asset purchases via quantitative easing and zero interest rates — as the sole post-credit-crisis stimulus.
Continues here: You’re the Fed Chairman. What Would You Do?