Interest Rate Pause

So does he think rates should go up more or down? It doesn’t really say.

 

@AgingGator ... what good points does he make?

 

I just read the article and I still have no idea what I read. It doesn't say why holding the rates are bad and what the Fed should have done instead

 

The Federal Reserve’s Pause Could Go Terribly Wrong

He thinks rates should go higher. I think the pause makes sense given the increase in long term rates via the market.

Real rates on TIPS are about 2.5% long term and higher short term. Contrast this with TIPS rates being negative a few years ago.

TIPS

 

See my post above. I’d rather they lean towards tightening vs easing all else equal but I think pausing is reasonable given long term rates.

Inflation won’t just go back down to 2%. It takes a long time to work through. Most of the 80’s it was in the 3-4% range and the 90s 2-3% range.

U.S. Inflation Rate 1960-2023

 

His four points are ...

1) Too many people have jobs ... must get lots people laid off so corporations can stop paying workers more than they want to.
2) The economy is still strong.
3) The economy has accepted and adjusted to the current rate hikes too easily.
4) The bond market is either getting it wrong or is being misinterpreted.

Sorry, but he lost me at #1. Getting massive amounts of people fired from their jobs because the cost of groceries is rising $1/year more per $100 than the fed's ideal number ... no thanks. #2 and #3 are not really "problems", either, IMO.

 

the rationale is if unemployment is too low, then wages increase, which causes prices to increase, and perpetuates the cycle. Wage increases by themselves are good, if due to productivity gains, but if they are just due to scarcity and just start a wage and price spiral that isn’t good.

 

That's a really dumb statement, given that I'm the one who agrees with what the people who set monetary policy did today, and you are the one running your mouth about what you think they did wrong...

 

That wasn’t a productive reply.

 

Friday is the labor report. Will be interesting

 

I don't understand what you mean. The only parts I disagree with is that it shouldn't be fed's job to put people out of work, or that the economy being resilient in the face of headwinds isn't a bad thing and something that needs to be stopped ... that article is one former Fed head's opinion, and it reads like a roadmap to Trump 2024, TBH, so that's probably why you like it.

 

I agree that I’d rather err to stopping inflation but the causes of inflation are multiple and the effectiveness of rate hikes are limited. Inflation was still greater than 2 percent 10-15 years after Volcker hiked rates. I am not sure crashing the economy because inflation is around 3% is necessarily helpful. Keep in mind the difference now is debt to gdp is much higher, and recsssions drive up debt, which will create even greater debt service burdens down the road.

 

You aren’t really making any sense. First, Trump hated high interest rates. He liked lots of debt and low rates. He chided Powell for raising rates.

Also, you are parroting the simplistic Jon Stewart narrative of the Fed is being bad and targeting wages and shouldn’t do that. That is a mischaracterization of what they are doing and why, and even left leaning Keynesian Paul Krugman has said as much.