The Fed did not raise rates because the FOMC concluded this was not the time to remove accommodation.
I agree this is not the time to remove accommodation. But I do not agree lower rates and QE are accommodative.
Changing rates shifts income between borrowers and savers, and with the federal debt just over 100% of GDP, the state is a large net payer of interest to the economy. So lowering rates reduces interest income paid by the state to the economy. Therefore that aspect of lowering rates imparts a contractionary bias and, yes, raising rates would impart an expansionary bias. In other words, the Fed has the ‘easing’ and ‘tightening’ thing backwards, and if it wants to impart an expansionary and inflationary bias a rate increase would be in order.
Paying more interest, however, does have distributional consequences, as the additional income paid to the economy goes to those holding government securities. Alternatively, a fiscal adjustment (tax cut and spending increase) directs additional spending power to other constituencies. So the remedies for a weak, deflationary outlook come down to some combination of rate hikes, tax cuts, or spending increases.
And given those choices, I think most of us would vote to leave rates at 0 and either cut taxes or increase public spending.
Additionally, the rate selected by the Fed translates into the term structure of prices presented to the economy, as forward pricing is necessarily a function of Fed rate policy. So in that sense, the term structure of rates put in place by Fed policy *is* the rate of inflation presented to the economy at any point in time.
Let me also add that setting a range for fed funds rather than a single interest rate gives the appearance of ignorance. A combination of paying interest on reserves and a few (reverse) repurchase agreements to pay interest on any residual funds not subject to interest on reserves would both do the trick and improve the optics.
And as for QE, the Fed buying secs is functionally identical to the tsy never having issued them, and instead letting tsy payments remain as reserve balances. That is, QE shifts duration but not quantity, and there is little to no evidence that shifting duration has a material effect on aggregate demand, inflation, or employment.
So while QE is just a placebo, like any placebo, it does impact the decisions of portfolio managers, corporations, central bankers, etc. who believe otherwise.
