If you have good credit and are buying a home today, you can certainly enjoy record low interest rates well under 4% thanks to the Federal Reserve’s decision to keep the rates of borrowing low post-recession.

But ZIRP – or the Fed’s zero-interest rate policy – is still the subject of much debate among leading economists, some of which ascended on Washington D.C. Tuesday to share their thoughts during a House Subcommittee hearing on monetary policy and trade.

Take the Fed’s decision to buy billions in mortgage-backed securities each month while keeping the federal funds rate near zero. John Taylor, a professor of economics at Stanford, advised the committee that despite claims these measures will aid a lagging job market, economic malaise persists three years after the eye of the recession’s storm.

“When the Fed engages in its current policy of quantitative easing, it finances its purchase of mortgage-backed securities or federal debt by crediting the banks with these deposits,” said Taylor. “The deposits—called bank reserves—normally are increased during times of financial stress, as on 9/11/2001, or during the panic in the fall of 2008.”

But he notes today’s increases in reserves are unprecedented. “The policy is a drag on the economy in part because people do not know how the bank reserves will be unwound, as they must be eventually,” Taylor explained.

Taylor’s testimony Tuesday was in direct contrast to testimony from Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics.

“Right now, total spending in the U.S. economy is too low,” he said in prepared testimony. “The appropriate monetary response is to lower interest rates to discourage saving and to encourage borrowing and thus spending.”

Gagnon sees the case for easy monetary policy as remaining strong while Allan Meltzer with Carnegie Mellon’s Tepper School of Business is taking the opposite approach by warning Congress about the risks of 1970s style inflation.

“Federal Reserve policy is repeating the same mistake that brought us the Great Inflation of the 1970s,” said Meltzer.

“Then, and now, the Federal Reserve expanded its balance sheet by financing the government’s budget deficits. This time the deficits are larger and the Fed’s purchases are much, much larger. And then, as now, the Fed tried to push unemployment rates down. Doing so, they ignore the lesson that Paul Volcker repeated many times: low expected inflation is the way to get low inflation.”


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