The problem is not tight money, it's unstable money
By Scott Sumner
Here’s Business Insider:
Janet Yellen’s warning about low rates causing a recession doesn’t make sense
Federal Reserve Chair Janet Yellen told Congress this week that the US central bank could cause a recession if it waited too long to raise interest rates.
Wait, what? Isn’t it the other way around? Yes, according to Yellen’s testimony just a year earlier.
In the past, Yellen and her most recent predecessor, Ben Bernanke, have emphasized that, because interest rates are still near zero and inflation has remained persistently below the Fed’s 2% target, it is safer for policymakers to err on the side of leaving borrowing costs low for longer.
People often assume that recessions are caused by tight money. It would be more accurate to say they are caused by unstable money. Money was not “tight” in any absolute sense during the 1980 and 1982 recessions, rather it was tight relative to the wildly expansionary monetary policy right before those two recessions. Yellen understands that the way to avoid recessions is a stable monetary policy. Business Insider doesn’t understand that this means rate cuts are appropriate at certain times, and rate increases at other times. Early next year she may not be re-appointed as Fed chair. If so, she may end up being the most successful Fed chair in history (in terms of stable NGDP growth, not banking regulation).
Just as valleys can be caused by mountains, recessions can be caused by overheated booms: