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Why Janet Yellen should ignore the experts and listen to this naive farmer

Fed Chair Janet Yellen.
Fed Chair Janet Yellen.
Win McNamee/Getty Images

In a piece for today's New York Times Magazine, Planet Money's Adam Davidson tells the story of Rick Stern, a farmer who is worried that higher interest rates will hurt him financially. Higher interest rates will mean a stronger dollar, which will make US crops less competitive on world markets. It will also make it more expensive for the farmer to borrow money to invest in his farm. So, Davidson concludes, Stern "just wishes the Fed would leave rates alone, and he can’t understand why they would even consider raising them."

"It’s politics," Stern tells Davidson. "Most politicians forget who they are and why they went to Washington."

But Davidson says our system is designed to ensure that people like Stern can't influence the Fed's decisions. "If the Fed added up all the ways a rate increase helped people in the short term and subtracted all the ways it hurt them, they would never raise rates," he argues. Yet if the Fed never raised rates, the result would be high rates of inflation. So Davidson argues that even though low interest rates would be better for Stern — and millions of other Americans — in the short run, it's a good thing that the Fed is empowered to raise rates anyway.

I think this actually gets things backward. In recent years, the political dynamic has generally cut in the opposite direction: The Fed has faced far more criticism from monetary hawks on the political right — who believed the Fed was keeping rates too low — than from doves pushing for more expansionary policies.

Right now, in fact, the Fed is under significant political pressure to raise rates. That's despite the fact that the inflation rate is currently below the Fed's 2 percent target — which would normally be considered a sign that interest rates are too high.

One reason for that, however, is that many mainstream pundits have adopted Davidson's view that monetary policy is too complicated for ordinary people to understand. The result of this isn't to free the Fed's technocrats to make decisions without political pressure. Instead, it amplifies the influence of people on the political fringes, most of whom currently believe the Fed has done too much to support the economy.

But the hawks are wrong, and the commonsense perspective of that farmer is right. Higher interest rates slow the economy, and with inflation at very low levels, there's no good reason to do that. And if ordinary people want to see the economy continue to boom, they might want to make their views known to policymakers.