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Article posted Feb 14 2012, 6:29 PM Category: Economy Source: Bloomberg Print

Fed Should Heed Lessons of 1920 Recession Response, Grant Says

By Cordell Eddings and Tom Keene

The U.S. has been “overmedicated” by public policy and should consider the government’s 1920’s response to recession, said James Grant, editor of Grant’s Interest Rate Observer.

Responding to a severe economic downturn from 1920 to 1921, the Federal Reserve increased interest rates and the national budget was balanced, moves that kept the painful recession short, New York-based Grant said. In contrast, he said U.S. policy makers are prolonging the pain of the so-called Great Recession by intervening in markets and running unprecedented federal budget deficits.

“The Fed is not content to let interest rates find their levels, they must repress them, and they are not content to let housing prices find their levels, they seek to intervene to prop them up,” Grant said in a radio interview on “Bloomberg Surveillance” with Ken Prewitt and Tom Keene. “The results of all this intervention is not to cure what ails us, but prolongs the symptoms of what distresses us.”

In January, the Fed extended its pledge to keep the target rate for overnight loan between banks near zero, as more than two years of economic growth have failed to push unemployment below 8.3 percent.

“Economic conditions -- including low rates of resource utilization and a subdued outlook for inflation over the medium run -- are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014,” the Federal Open Market Committee said in a statement on Jan. 25.

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