Friedman vs Woodford

The Fed's shift to an "abundant reserves" system post-2008 has severed the link between interest rates and money supply growth, creating policy uncertainty. This regime, influenced by academic theories like Michael Woodford's, prioritizes managing market expectations over fundamental economic indicators. The authors argue this approach, coupled with quantitative easing, led directly to the current inflation problem, echoing Milton Friedman's warnings about excessive money printing.

They propose returning to a system where interest rates track nominal GDP growth, suggesting a current target of around 3.875% is too low given recent economic data. Money supply growth, they contend, should be aligned with nominal GDP as well, around 5.5% to 6.0%. The authors express concern that the Fed, under new leadership aiming to reduce "forward guidance," still faces significant academic and market support for its current, flawed policy framework.