The argument can be summed up as “zero rates equals zero growth and zero inflation.” On this analysis, what John Maynard Keynes called “animal spirits” become depressed when borrowing costs stagnate at almost nothing. By leaving rates close to zero since the end of 2008, the Fed is basically telling companies and consumers to stay afraid of the economic outlook.
On Thursday, prior to the Fed decision, I asked Andreas Utermann, who helps oversee about $471 billion as global chief investment officer at Allianz Global Investors, what the effect on growth might be if the Fed jumped to normality in one leap instead of baby steps of quarter-point increases. “It wouldn’t be unambiguously bad,” Utermann told me. In particular, while short-term borrowing costs would leap to match the Fed’s move, Utermann said the cost of longer-dated money probably wouldn’t accelerate; the borrowing climate for business investment wouldn’t worsen until normal monetary policy produced inflation. He also said that the economic backdrop has changed, and that the world needs to get used to a new normal that might mean zero inflation persists for a long time.