If Fed Can't Fine-Tune, It Should Focus on Inflation
Notice in the chart above that over the last 7 years the Federal Reserve has moved the target Fed Funds rate (blue line) from 6% in early 2001 to 1% for about 12 months from mid-2003 to mid-2004, and then back up 5.25% from mid-2006 to mid-2007, and now it's back down to 4.5%.
And yet despite the 5 percent range (1% to 6%) in the target Fed Funds rate, the 10-year T-note yield has mostly stayed within a half percentage point of its 4.52% average yield during this period. In about 80% of the months from 2001-2007 the 10-year T-note yield stayed within a narrow 1 percentage point range between 4-5%, and varied just slightly above 5% and slightly below 4% with equal frequency the rest of the time.
Bottom Line: The Fed can move its target short-term Fed Funds target rate up and down by a huge 5 percentage point range from a low of 1% to a high of 6%, with no significant effect on long-term rates. If the Fed can't make long-term interest rates change when it makes dramatic changes in monetary policy, doesn't that mean the Fed is largely ineffective at discretionary, activist, countercyclical fine-tuning and instead should just focus exclusively on an inflation target?