During his appearance on “Cavuto: Coast to Coast,” Monday, former Reagan economist Art Laffer discussed the Fed’s handling of inflation ahead of this week’s FOMC meeting, arguing they need to raise controlled rates to the market rates level “as fast as they can.”
ART LAFFER: Well, they [Fed] aren’t working on this very well because frankly, the way they set the interest rates, Neil, it’s a price control mechanism. What really needs to be done is market rates have to get up, the controlled rates have to get up to the market rates before they’ll start having the real effect on this, just the way [Paul] Volcker did it. He allowed rates to seek their own level, and that’s why we got rid of inflation so quickly.
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These people are not doing that. They’re trying to control the rise in rates, and they’re going to have to keep raising those rates until they get in the market area. And that’s a long way off. With inflation running six, seven, eight percent. The spot, you know, the 30-day T-bill yield should be much higher than it is at 4%, which I mean, maybe six or 7%. And that would be if the real yield were zero, which you can’t have a real yield of zero and not have a recession downturn or bad. Because the real yield is the expected real return on a unit of capital over the coming period, a year or two years or ten years. And so it’s really a very tough situation they’re in. But I think they need to raise those rates up to market rates as fast as they can.
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