In which I read Paul Krugman, & once again find myself arguing myself into believing that the Federal Reserve ought to have spent this spring cutting interest rates...
I remain perturbed that many prominent economists, excluding Krugman & DeLong, are fanning inflation fears. Most Americans live in fear of crime, immigration, inflation, unemployment, pickled beets (probably), and who knows what else.
I know nuance doesn't get clicks, but we desperately need statements of basic facts before we run into the arm of a dictator.
"Am I wrong to wish that the Federal Reserve had cut short-term interest rates this spring in order to keep the Ten-Year Treasury real rate around +1.5%?"
Yes. You should have wished for the Fed to cut the EFFR in December _because appeared that it was going to be successful in returning PCE inflation to 2%_ [That's what TIPS traders thought] and there have been 5 opportunities since then to raise, lower or leave the EFFR unchanged as new data become available. You should not wish the Fed to target any interest rate.
Is r* supposed to be a long-term rate? I thought it was the shorter policy intervention rate (a synecdoche for the entire vector of policy instruments the Fed might use to raise or lower inflation) that KEEPS inflation _at_ target, not what RETURNS it _to_ target.]
"The core PCE plotted above omits food and energy not because people do not buy them, but because there is a long historical track record that tells us that future inflation is much better forecast by core inflation than by the full headline index."
Why is PCE t0 a better _forecast_ of PCE t+1 than NASDAQ t0 is of NASDAQ t+1?
If the Fed wants a forecast, they have TIPS (or they could have if they would prevail upon "Treasury to create some shorter tenor TIPS)
I'd always heard that taking out food and fuel just reduced the variance w/o changing the mean???
With the caveat that I have not followed the markets for a long time, I wonder if this story is too simple. The rising real rates could indicate future inflation or, a drop in demand for the treasuries. The recent rise in real interest rates has been followed by a rapid rise in equities (e.g. S&P500). Back in 1987, IIRC, over the summer, equities and bonds moved in opposite directions, possibly as bonds were liquiddated to buy the rising equities. Then the October crash happened. Is there any possibility that we are seeing a familiar problem? I ask, become the rising stock markets have been largely propelled by the hype in tech stocks, particularly those with AI-related assets. This seems remarkably similar to the late 1990s dot.com boom, a bubble that burst. [This may be part of point 4 of the events section in the OP].
Krugman may be right, but is it for the right reason?
I remain perturbed that many prominent economists, excluding Krugman & DeLong, are fanning inflation fears. Most Americans live in fear of crime, immigration, inflation, unemployment, pickled beets (probably), and who knows what else.
I know nuance doesn't get clicks, but we desperately need statements of basic facts before we run into the arm of a dictator.
"Am I wrong to wish that the Federal Reserve had cut short-term interest rates this spring in order to keep the Ten-Year Treasury real rate around +1.5%?"
Yes. You should have wished for the Fed to cut the EFFR in December _because appeared that it was going to be successful in returning PCE inflation to 2%_ [That's what TIPS traders thought] and there have been 5 opportunities since then to raise, lower or leave the EFFR unchanged as new data become available. You should not wish the Fed to target any interest rate.
Is r* supposed to be a long-term rate? I thought it was the shorter policy intervention rate (a synecdoche for the entire vector of policy instruments the Fed might use to raise or lower inflation) that KEEPS inflation _at_ target, not what RETURNS it _to_ target.]
"The core PCE plotted above omits food and energy not because people do not buy them, but because there is a long historical track record that tells us that future inflation is much better forecast by core inflation than by the full headline index."
Why is PCE t0 a better _forecast_ of PCE t+1 than NASDAQ t0 is of NASDAQ t+1?
If the Fed wants a forecast, they have TIPS (or they could have if they would prevail upon "Treasury to create some shorter tenor TIPS)
I'd always heard that taking out food and fuel just reduced the variance w/o changing the mean???
With the caveat that I have not followed the markets for a long time, I wonder if this story is too simple. The rising real rates could indicate future inflation or, a drop in demand for the treasuries. The recent rise in real interest rates has been followed by a rapid rise in equities (e.g. S&P500). Back in 1987, IIRC, over the summer, equities and bonds moved in opposite directions, possibly as bonds were liquiddated to buy the rising equities. Then the October crash happened. Is there any possibility that we are seeing a familiar problem? I ask, become the rising stock markets have been largely propelled by the hype in tech stocks, particularly those with AI-related assets. This seems remarkably similar to the late 1990s dot.com boom, a bubble that burst. [This may be part of point 4 of the events section in the OP].
Krugman may be right, but is it for the right reason?
The rise in real rates that Brad is referring to comes from forward looking metrics. Those are TIPS yields.
And yes, Brad, they should have been cutting imho.