The Pros of Higher Interest Rates -- Stanford Economist John Taylor

Higher interest rates would be beneficial to the U.S. economy, says Stanford University economist. The Federal Reserve should return to conventional monetary policy as soon as possible.
By Rhonda Schaffler ,

The Federal Reserve should return to conventional monetary policy as soon as possible, as higher interest rates would be beneficial to the U.S. economy, said noted economist John Taylor of Stanford University. Taylor spoke with TheStreet during a conference called "Rethinking Monetary Policy," which was held at the Cato Institute in Washington, D.C. Thursday.

"To me the rethinking in some sense is going back and seeing why things worked well when they did in the '80s and '90s until this period," said Taylor. "Rethinking means adapting some of the things that we forgot."

Taylor argues that unconventional Fed policy, which was enacted in response to the financial crisis, has in some ways been detrimental. "The world has suffered in a way from being off track, from these very unusual policies. And so fixing that, getting back to where I think the Fed wants to go, would be an improvement," explained Taylor. "Just globally speaking, it's not been a very successful decade."

Taylor argues for a rules-based policy system for Central Banks, saying it would lead to less volatility in policy making. Taylor is widely known for creating the so-called "Taylor rule," which uses a set benchmark for adjusting monetary policy based on inflation and economic conditions.

The Federal Reserve is widely expected to raise interest rates at its policy-making meeting in December, despite the fact that there are signs the economy is not overheating. While employment numbers have improved, GDP growth in the U.S. is still sluggish, and inflation is tame. But Taylor said those are not reasons to continue to keep rates low.

"By all accounts, if you compared where we are now by those measures to 10 years ago, 15 years ago, we already would have had 2% interest rates and the economy just did well," said Taylor. "The economy would probably be working better with a higher interest rate."

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