Version published 2024-02-05 Mo <https://www.project-syndicate.org/commentary/fed-monetary-policy-remaining-restrictive-rather-than-neutral-despite-balanced-economy-by-j-bradford-delong-2024-02>...
Members of the FOMC no doubt have plutocrats shouting in their ears about labor costs. Hence their reluctance to accept a full employment economy. Also, the political factor of Trump maintaining a rate reduction is a dirty trick to reelect Biden.
Why does the Fed not consider damage to the housing market caused by high interest rates? Hello? The housing crisis is far worse even while employment is already a shining diamond. Little help here!
Central banks around the world are circling the wagons in defence of aggressive anti-inflation policies. A rapid return to 2-3 per cent inflation, accompanied by a not-too-bad recession would suit their institutional interests better than a transitory episode of inflation whose end wasn't obviously related to interest rate policy. If inflation can decline while the economy is near full employment, what is the meaning of the NAIRU?
This Beveridge curve discourse is so baffling to an outsider. The stylized shape of the curve is plausible from theoretical considerations, but no economist can calculate it from first principles; quantitatively, it is a purely empirical relationship. And while it is a *somewhat* stable relationship, in the short- to medium-term, it isn't all *that* stable, shifting uneasily from time to time like the Tigris in its bed. To impute reasons that "explain" these shifts - "skills mismatch", "extended unemployment benefits" - seems already pretty dodgy; how different is that really from the talking heads on business news who "explain" every shift in the market index?
But to say "no, this observation doesn't fit on the historical curve, therefore it is a disequilibrium number, and future observations will soon revert to the old data" is a category error. You can't say that an empirical observation is inconsistent with empirical observations! It is like sticking your head out the window, seeing blue sky and sunshine, and saying "no, that's a mistake, really it ought to be raining."
I think Powell was criticizing the Federal deficit as fiscal policy (over the wars and national defense) is competing against monetary policy. Deficit spending requires a higher interest rate to keep inflation at the 2% target. Otherwise there will need to be a series of new laws to keep the money tucked away from circulation. But already in our area, Dollar General, CVS, and Walmart are suffering for labor at the hands of the military industrial complex.
When thinking about fiscal policy, we talk about the fiscal impulse. "Neutral" policy would be the deficit you ran last year or quarter - a smaller deficit is contractionary, not stimulative, relative to state of the economy before the change.
I get that maintaining risk-free short-term rates above r* is contractionary, in some way - that it is a restrictor plate on what the economy would do otherwise. But if the economy is showing no sign of slowing GDP growth, increased unemployment, or below target inflation, what's the rush to change the policy stance? Sure, you want to get to r* eventually, but if you do it quickly the odds of overheating seem high.
Bravo. A clear-headed (and fun to read) article that states the downsides of contractionary monetary policy in a full-employment, non-inflationary economy.
We need to narrow the inflation management mandate. The FOMC seems to believe that raising rates is appropriate for managing inflation caused by supply shocks. With global supply chains and reticent Pax Americana, that is a recipe for exacerbating disaster. For example, if China blockades or invades Taiwan. We would need lower rates to stimulate domestic investments. We've also mixed asset prices, in the form of rent, into inflation. So now a shortage of shelter causes higher interest rates, which reduces the investment which could address the problem.
Members of the FOMC no doubt have plutocrats shouting in their ears about labor costs. Hence their reluctance to accept a full employment economy. Also, the political factor of Trump maintaining a rate reduction is a dirty trick to reelect Biden.
Why does the Fed not consider damage to the housing market caused by high interest rates? Hello? The housing crisis is far worse even while employment is already a shining diamond. Little help here!
Central banks around the world are circling the wagons in defence of aggressive anti-inflation policies. A rapid return to 2-3 per cent inflation, accompanied by a not-too-bad recession would suit their institutional interests better than a transitory episode of inflation whose end wasn't obviously related to interest rate policy. If inflation can decline while the economy is near full employment, what is the meaning of the NAIRU?
This Beveridge curve discourse is so baffling to an outsider. The stylized shape of the curve is plausible from theoretical considerations, but no economist can calculate it from first principles; quantitatively, it is a purely empirical relationship. And while it is a *somewhat* stable relationship, in the short- to medium-term, it isn't all *that* stable, shifting uneasily from time to time like the Tigris in its bed. To impute reasons that "explain" these shifts - "skills mismatch", "extended unemployment benefits" - seems already pretty dodgy; how different is that really from the talking heads on business news who "explain" every shift in the market index?
But to say "no, this observation doesn't fit on the historical curve, therefore it is a disequilibrium number, and future observations will soon revert to the old data" is a category error. You can't say that an empirical observation is inconsistent with empirical observations! It is like sticking your head out the window, seeing blue sky and sunshine, and saying "no, that's a mistake, really it ought to be raining."
I think Powell was criticizing the Federal deficit as fiscal policy (over the wars and national defense) is competing against monetary policy. Deficit spending requires a higher interest rate to keep inflation at the 2% target. Otherwise there will need to be a series of new laws to keep the money tucked away from circulation. But already in our area, Dollar General, CVS, and Walmart are suffering for labor at the hands of the military industrial complex.
When thinking about fiscal policy, we talk about the fiscal impulse. "Neutral" policy would be the deficit you ran last year or quarter - a smaller deficit is contractionary, not stimulative, relative to state of the economy before the change.
I get that maintaining risk-free short-term rates above r* is contractionary, in some way - that it is a restrictor plate on what the economy would do otherwise. But if the economy is showing no sign of slowing GDP growth, increased unemployment, or below target inflation, what's the rush to change the policy stance? Sure, you want to get to r* eventually, but if you do it quickly the odds of overheating seem high.
Bravo. A clear-headed (and fun to read) article that states the downsides of contractionary monetary policy in a full-employment, non-inflationary economy.
We need to narrow the inflation management mandate. The FOMC seems to believe that raising rates is appropriate for managing inflation caused by supply shocks. With global supply chains and reticent Pax Americana, that is a recipe for exacerbating disaster. For example, if China blockades or invades Taiwan. We would need lower rates to stimulate domestic investments. We've also mixed asset prices, in the form of rent, into inflation. So now a shortage of shelter causes higher interest rates, which reduces the investment which could address the problem.