Editor's note.

• Author: Dorn, J.A.

The articles in this issue of the Cato Journal were first presented at Cato's 33rd Annual Monetary Conference, "Rethinking Monetary Policy," held in Washington, D.C., on November 12, 2015. At the time of the conference, the Federal Reserve had not raised its policy interest rate since 2006, and had kept it close to zero since 2008. The Federal Open Market Committee then raised the target range for the federal funds rate by 25 basis points in December 2015.

Unconventional monetary policy--characterized by "zero interest rate policy" (ZIRP) and "quantitative easing" (QE), along with macro-prudential regulation--has increased the power of central banks in the United States, Japan, and Europe. Ultra-low interest rates and large-scale asset purchases were supposed to create a wealth effect and stimulate real growth, but those effects have been weak at best. Meanwhile, unconventional monetary policy has created new risks and greatly distorted capital markets.

The monetary base has increased dramatically, along with the size of the Fed's balance sheet, but the monetary transmission mechanism is plugged up by interest on excess reserves, macro-prudential regulation (including, e.g., Dodd-Frank and Basel III), and regime uncertainty. Conventionally measured inflation is low, but Fed policy has encouraged risk taking and helped inflate financial asset prices. Fed watching has become an obsession, diverting resources away from more productive activities.

Money creation is not a panacea and cannot lead to a permanent increase in society's productive capacity or create new wealth. Once rates return to normal, so will asset prices; the Fed's "wealth...