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Matthew C Klein

Why Michael Woodford Thinks the Fed Should Taper

The Columbia University economist is known for supporting aggressive monetary stimulus, yet thinks the time for QE has come to an end.

Michael Woodford is one of the world's preeminent monetary theorists, which is why you should read the thorough profile written about him by my colleagues at Bloomberg Markets. Buried inside the article is the revelationthat Woodford wants the Federal Reserve to cut back on its asset purchases as soon as possible. That wasn't what I was expecting from a known advocate of "unconventional" monetary stimulus, so I asked him to explain his views more thoroughly.

First, a little background. Among central bankers and those who watch them, Woodford is most associated with something called "forward guidance." The idea comes from a 2003 paper he wrote with Gauti Eggertsson, then an economist at the International Monetary Fund. They were trying to come up with a way to stimulate weak economies after short rates had already fallen to zero percent. (Rates can theoretically go below zero but that would probably make things worse.) Their insight was that central banks can theoretically suppress long-term interest rates by promising to keep short rates low for longer than traders expect. All of the big rich-country central banks have since adopted this approach.