My March 2024 Project Syndicate column on the state of the macroeconomy and of macroeconomic policy. tl;dr: Is the Fed too far out over its skies with high interest rates? Is the payroll survey...
"The neutral rate, .... is the level necessary to “bring about an adjustment between the propensity to consume and the inducement to invest.” An interest rate that everyone considers to be above the neutral level therefore reflects markets’ confidence that a recession – or at least a substantial slowdown – is only a matter of time."
But both consumption and investment spending have done OK so far. People who have waited for a recession over the past two years have a lot of egg on their faces. There was probably a legit period to be more worried. But less so now. Lately, most measures of financial conditions have eased over the near term. For example, see the Fed's own Senior Bank Loan Officers Survey. Look at the recent changes in the auto loan (consumption) and construction-development loan (fixed investment) components, for instance. It almost seems like we avoided a sort of self-fulfilling bad situation. Lending standards tightened as every bank's economist warned that a recession is nigh. There will be losses. But the recession didn't come. Now the standards are easing. That could be allowing the Fed to risk a Wile E Coyote stance.
"The neutral rate, .... is the level necessary to “bring about an adjustment between the propensity to consume and the inducement to invest.” An interest rate that everyone considers to be above the neutral level therefore reflects markets’ confidence that a recession – or at least a substantial slowdown – is only a matter of time."
But both consumption and investment spending have done OK so far. People who have waited for a recession over the past two years have a lot of egg on their faces. There was probably a legit period to be more worried. But less so now. Lately, most measures of financial conditions have eased over the near term. For example, see the Fed's own Senior Bank Loan Officers Survey. Look at the recent changes in the auto loan (consumption) and construction-development loan (fixed investment) components, for instance. It almost seems like we avoided a sort of self-fulfilling bad situation. Lending standards tightened as every bank's economist warned that a recession is nigh. There will be losses. But the recession didn't come. Now the standards are easing. That could be allowing the Fed to risk a Wile E Coyote stance.
Another part of the mystery is that Australia's nominal interest rates are close to those in the US (slightly below over most terms), even though inflation is higher. It really seems as if the Fed can determine the real interest rate, even over long terms.
But we are not (quite yet) at full employment with ont-target inflation, so, in principle the is no contradiction between the actual ERRF and the ineffable r*. Now I share DeLong's puzzlement that the Fed should not have already started to feel its way down from the maximum EFFR, but that puzzlement need not depend on a precise estimate of r*. [I think I share DeLong's hypothesis for the lack of Fed action. It sees great harm to its reputation from lowering the EFFE and -- God forbid -- having to raise again within months, the EPV of that outcome being less than the EPV of a recession, a view that we think is abhorrent.]
Nevertheless, If we ARE going to speculate about where r* is, my guess is that it IS quite a bit higher than pre pandemic because of the mammoth federal deficit whihc is a drag on private investment and growth.
I go with the theory that the Fed are trying to help Trump by slowing the economy before the election.
Of course the only data supporting that is the history of Fed Scale Thumbing. And there is no evidence acceptable to a Federalist Society Judge or Justice that would support motive.
My apologies for posting the same thing twice. It gave me the option of posting again as if the previous one didn't go through.
"The neutral rate, .... is the level necessary to “bring about an adjustment between the propensity to consume and the inducement to invest.” An interest rate that everyone considers to be above the neutral level therefore reflects markets’ confidence that a recession – or at least a substantial slowdown – is only a matter of time."
But both consumption and investment spending have done OK so far. People who have waited for a recession over the past two years have a lot of egg on their faces. There was probably a legit period to be more worried. But less so now. Lately, most measures of financial conditions have eased over the near term. For example, see the Fed's own Senior Bank Loan Officers Survey. Look at the recent changes in the auto loan (consumption) and construction-development loan (fixed investment) components, for instance. It almost seems like we avoided a sort of self-fulfilling bad situation. Lending standards tightened as every bank's economist warned that a recession is nigh. There will be losses. But the recession didn't come. Now the standards are easing. That could be allowing the Fed to risk a Wile E Coyote stance.
"The neutral rate, .... is the level necessary to “bring about an adjustment between the propensity to consume and the inducement to invest.” An interest rate that everyone considers to be above the neutral level therefore reflects markets’ confidence that a recession – or at least a substantial slowdown – is only a matter of time."
But both consumption and investment spending have done OK so far. People who have waited for a recession over the past two years have a lot of egg on their faces. There was probably a legit period to be more worried. But less so now. Lately, most measures of financial conditions have eased over the near term. For example, see the Fed's own Senior Bank Loan Officers Survey. Look at the recent changes in the auto loan (consumption) and construction-development loan (fixed investment) components, for instance. It almost seems like we avoided a sort of self-fulfilling bad situation. Lending standards tightened as every bank's economist warned that a recession is nigh. There will be losses. But the recession didn't come. Now the standards are easing. That could be allowing the Fed to risk a Wile E Coyote stance.
Another part of the mystery is that Australia's nominal interest rates are close to those in the US (slightly below over most terms), even though inflation is higher. It really seems as if the Fed can determine the real interest rate, even over long terms.
But we are not (quite yet) at full employment with ont-target inflation, so, in principle the is no contradiction between the actual ERRF and the ineffable r*. Now I share DeLong's puzzlement that the Fed should not have already started to feel its way down from the maximum EFFR, but that puzzlement need not depend on a precise estimate of r*. [I think I share DeLong's hypothesis for the lack of Fed action. It sees great harm to its reputation from lowering the EFFE and -- God forbid -- having to raise again within months, the EPV of that outcome being less than the EPV of a recession, a view that we think is abhorrent.]
Nevertheless, If we ARE going to speculate about where r* is, my guess is that it IS quite a bit higher than pre pandemic because of the mammoth federal deficit whihc is a drag on private investment and growth.
I go with the theory that the Fed are trying to help Trump by slowing the economy before the election.
Of course the only data supporting that is the history of Fed Scale Thumbing. And there is no evidence acceptable to a Federalist Society Judge or Justice that would support motive.
I disagree. A reluctance to moving monetary policy instruments goes back a long ways.