Do you agree with the Fed lowering rates? I generally agree with Friedman that the Fed should target price stability because the Phillips curve only holds in the short run (it probably doesn't even hold in the short run anymore). But these are exceptional circumstances, and I think inflation is a lesser evil than unemployment.
In my unorthodox framework, the tariffs and deportations require relative prices to adjust to maintain full employment (full employment to produce lower real incomes, but full employment). But prices like wages and real estate cannot easily adjust downward so it other absolute prices do not increase, those markets will not clear (=unemployment). This means their ARE _sector-level_ "Phillip Curve" from I => U. Observed aggregate U is thus a symptom of inadequate relative price adjustment and a need for more aggregate inflation.
Bottom line, I see a rationale for rate cut to produce more over-target inflation. The actual decision turns on questions of how much. How MUCH adjustment of relative prices do the actual (and expected) tariffs and deportations cause? Is the existing EFFR/inflation levels ENOUGH to facilitate those adjustments with no more needed? MY _guess_ is that more is needed (so Trump is directionally right). :)
Trump being Trump, the time for a principled stand will still come.
That makes sense, but if the tariffs trickle down to consumer prices and the Fed keeps lowering rates, that could spark bad inflation. The current situation requires a delicate balancing act made all the more difficult by uncertainty, policy lags, and Trump's pressure on the Fed.
I think in twenty years, this Fed will either be heralded for getting us through the coming storm or be viewed as inept/downright harmful. Do you think J Powell will rise to the moment?
Absolutely it is a delicate balance. I'm pretty pro Powel in that I thing the Fed got the COVID shocks pretty close to right: shortest recession and no recession on disinflating. The danger is in de-anchoring expectations. [In my framework that means that inflation does not facilitate relative price adjustments; the relative price rigidities become real, not nominal rigidities]
[TIPS is not worried about de-anchoring. 5 Yr is 14 bp over target, 10 years 8 bp]
I think it would help if the Fed were more explicit about causing temporary inflation for a reason. It is not necessarily a mistake or failure (although causing more than necessary woud be).
I'm honestly kind of anti-Powell. Yes, the Fed needed to push against the wind because of the lockdown (though we should never have locked down for as long and as severely as we did). However, the Fed went overboard and accelerated MV growth instead of maintaining it at a steady rate.
Yes, the Fed achieved a soft landing, but that probably has more to do with the credibility the Fed built up since Volcker. Credibility that was hard won and can be easily lost.
That said, I will give Powell credit for holding his ground against Trump. The Fed, for all its faults and missteps, must remain independent. Our economy and liberal system depend on it!!!
It depend on how much (if any) of the acceleration was necessary to produce that short recession and how much if any produced _excess_ inflation. Practically, when should the Fed have started to disinflate? April 21? [the NDGP view] September 21? [Radical Centrist = TIPS goes over target] or March 22 [actual]
I'm just starting to learn about movements along vs. shifts of the Taylor curve in my financial economics class! :) When do you think each is appropriate? What would your approach have looked like during the pandemic?
I also think it would have been nice if the Fed had held rates steady as a rejoinder to Trump and an affirmation of its independence, but they probably are doing what they would have done in the absence of political pressure. Trump is just making such a mess of things, as always!
We argue a lot, but if you wanted to become a dictator, I would totally back you! Libertarian economics>Radical Centrist economics> left-wing populism> right-wing populism. I won't be able to get the first option, so I'd like the second one. :(
Do you agree with the Fed lowering rates? I generally agree with Friedman that the Fed should target price stability because the Phillips curve only holds in the short run (it probably doesn't even hold in the short run anymore). But these are exceptional circumstances, and I think inflation is a lesser evil than unemployment.
You are writing my next post; :)
I look forward to it :)
In my unorthodox framework, the tariffs and deportations require relative prices to adjust to maintain full employment (full employment to produce lower real incomes, but full employment). But prices like wages and real estate cannot easily adjust downward so it other absolute prices do not increase, those markets will not clear (=unemployment). This means their ARE _sector-level_ "Phillip Curve" from I => U. Observed aggregate U is thus a symptom of inadequate relative price adjustment and a need for more aggregate inflation.
Bottom line, I see a rationale for rate cut to produce more over-target inflation. The actual decision turns on questions of how much. How MUCH adjustment of relative prices do the actual (and expected) tariffs and deportations cause? Is the existing EFFR/inflation levels ENOUGH to facilitate those adjustments with no more needed? MY _guess_ is that more is needed (so Trump is directionally right). :)
Trump being Trump, the time for a principled stand will still come.
That makes sense, but if the tariffs trickle down to consumer prices and the Fed keeps lowering rates, that could spark bad inflation. The current situation requires a delicate balancing act made all the more difficult by uncertainty, policy lags, and Trump's pressure on the Fed.
I think in twenty years, this Fed will either be heralded for getting us through the coming storm or be viewed as inept/downright harmful. Do you think J Powell will rise to the moment?
Absolutely it is a delicate balance. I'm pretty pro Powel in that I thing the Fed got the COVID shocks pretty close to right: shortest recession and no recession on disinflating. The danger is in de-anchoring expectations. [In my framework that means that inflation does not facilitate relative price adjustments; the relative price rigidities become real, not nominal rigidities]
[TIPS is not worried about de-anchoring. 5 Yr is 14 bp over target, 10 years 8 bp]
I think it would help if the Fed were more explicit about causing temporary inflation for a reason. It is not necessarily a mistake or failure (although causing more than necessary woud be).
I'm honestly kind of anti-Powell. Yes, the Fed needed to push against the wind because of the lockdown (though we should never have locked down for as long and as severely as we did). However, the Fed went overboard and accelerated MV growth instead of maintaining it at a steady rate.
Yes, the Fed achieved a soft landing, but that probably has more to do with the credibility the Fed built up since Volcker. Credibility that was hard won and can be easily lost.
That said, I will give Powell credit for holding his ground against Trump. The Fed, for all its faults and missteps, must remain independent. Our economy and liberal system depend on it!!!
It depend on how much (if any) of the acceleration was necessary to produce that short recession and how much if any produced _excess_ inflation. Practically, when should the Fed have started to disinflate? April 21? [the NDGP view] September 21? [Radical Centrist = TIPS goes over target] or March 22 [actual]
I'm just starting to learn about movements along vs. shifts of the Taylor curve in my financial economics class! :) When do you think each is appropriate? What would your approach have looked like during the pandemic?
Not the Phillips Curve.
That’s faiir
I also think it would have been nice if the Fed had held rates steady as a rejoinder to Trump and an affirmation of its independence, but they probably are doing what they would have done in the absence of political pressure. Trump is just making such a mess of things, as always!
We argue a lot, but if you wanted to become a dictator, I would totally back you! Libertarian economics>Radical Centrist economics> left-wing populism> right-wing populism. I won't be able to get the first option, so I'd like the second one. :(
:)