The Fed Will Have No Need to 'Taper' if it Adopts a Dollar-Price Rule

With the Federal Reserve’s recent announcement that it’s set to begin reducing its monthly purchases of interest-bearing bonds, the conversation has partially shifted to the economic implications of the central bank’s pivot. If the ‘taper’ is engineered properly, the near and long-term results have the potential to be very positive.

To see why, it’s useful to look back to Robert L. Bartley’s essential 1992 book, The Seven Fat Years. Bartley was of course the long-time editor of the Wall Street Journal’s editorial page, and monetary policy was a major focus of his writing.

In a 1986 editorial referenced within, Bartley observed about monetary policy that “a central bank can follow a quantity rule,” or it can utilize “a price rule, which we have come to favor in light of recent experience.” The Fed can focus on the quantity of dollars created without regard to the dollar’s value, or it can focus on stabilizing the value of the dollar without regard to the quantity of dollars issued.

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