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28 thoughts on “Fed should stay calm on inflation

  1. golack

    And "steady" means???
    The market has "priced in" a 0.75% increase, not their previously telegraphed 0.5% increase. And the market reaction after their announcement will probably be bad either way.

    1. golack

      OK, market was up early, down after announcement, and as the CNN headline says, "and now the stock market LOVES the Fed news"
      What a fickle beast....

  2. Jasper_in_Boston

    As with most things related to policy, I view the inflation situation through the lens of politics, or, more precisely, what actions and outcomes are most likely to hurt Republicans and help Democrats.

    In my view Democrats absolutely will not secure a second White House term unless inflation is brought under control. I've already written off midterms. It's going to be ugly.

    A recession, by contrast, I believe to be a survivable event for Democrats if A) it's relatively mild and/or B) it's lifting by the beginning of 2024. Eisenhower, Nixon, Reagan, W. Bush and Obama all survived first term recessions.

    So, count me as among those cheering on robust action on the part of the Fed. Yes, I could be wrong. Yes, recessions are obviously painful things. But so is elevated inflation. Both carry political risk.

    (Relatedly, if we are going to have a recession, better that it come as soon as possible than arrive, say, the middle of next year). Also, because the next recession looks like it's going to be of the old school "remove the punch bowl" variety as opposed to the burst bubble species, I think there's a fair chance we'll likewise get a V-shaped recovery.

    Anyway, that's my take.

    PS—None of this means GOP elections-nullification might not happen. It remains a worryingly plausible possibility, and so the above calculus is only relevant in the universe where the US manages to stave off such an outcome.

  3. middleoftheroaddem

    The actions of the Fed are both political and economic. While I have an advanced degree relevant to the topic, I am FAR from qualified on appropriate Fed rate setting.

    With the aforementioned said, today we still have near zero or negative real interest rates on some commercial loans: this has an expansionary impact on the economy. It is my guess, the Fed will have to continue to raise the Fed Funds rate several more times, perhaps we need to hit something like a 4.5% Fed Funds rate, to materially reduce inflation.

    On the political front, inflation is clearly damaging to the Biden admin and Democrats more broadly. I THINK a near turn downturn, with an up tick, is better than our current economic trajectory.

    https://www.investopedia.com/ask/answers/032515/what-difference-between-real-and-nominal-interest-rates.asp#:~:text=A%20real%20interest%20rate%20is,before%20taking%20inflation%20into%20account.

    1. lisagerlich

      "While I have an advanced degree relevant to the topic, I am FAR from qualified on appropriate Fed rate setting."
      You are no different from the "experts" at the Fed. But at least you admit it.
      Anyway - I think the better way to slow inflation is to restrict government spending. Our debt has surpassed $30 trillion, exceeding economic output by 143% and equating to $243,000 in obligations per taxpayer.
      The federal budget proposed in May of 2021 is over $6 trillion for one year. At that time, tax revenues were predicted at about $4 trillion, which would add another $2 trillion to the debt. This will not be a popular opinion on this blog, but I believe the debt is far more dangerous to future generations than is "climate change."

      1. Lounsbury

        Nonsensical innumreracy.

        Debt is not "dangerous" for future generations, and it is delusional to put this in the category of climate change - no "scare quotes" except for the delusional.

        For a country, like for an enterprise, debt is a useful tool, but one that needs to be used within certain ratios or one is running elevated risk of having problems. While superstitious innumerates can choose to run a company with no leverage, efficient modern management uses this judiciously. The same with countries. Running debt to pay for current obligations is deeply unwise. Running debt for investment in long-term productive assets (infrastructure, productivity building services) is quite sensible and in no way a "danger" - what rather is a danger is innumerate backwards ignorance.

        1. Starglider

          Judiciously: with good judgment or sense.

          Heh, you expect our politicians, who are more interested in gathering and maintaining power, to exercise good judgement or sense?

          Okay, then answer this: where does it end? How much debt is too much debt? S&P has already downgraded us once. At the rate we're going, it looks like there is no limit to this. Except there is always a limit; once the party is over, somebody will be left with the check - likely our children.

        2. lisagerlich

          I do understand about leverage. I would not own my home if not for a loan. However, as I recall, there was a formula you used to figure out how much home you could afford. A modern business does need leverage. But, if the company becomes over-leveraged, it goes bankrupt. We are lucky as Americans because the dollar has been the world's reserve currency for some time. That may be changing. I imagine Paul Krugman may disagree, but I think that is the only reason we have gotten away with printing so much money for so many years.

        3. lisagerlich

          I meant to reply to you, not Starglider. I do understand about leverage. I would not own my home if not for a loan. However, as I recall, there was a formula you used to figure out how much home you could afford. A modern business does need leverage. But, if the company becomes over-leveraged, it goes bankrupt. We are lucky as Americans because the dollar has been the world's reserve currency for some time. That may be changing. I imagine Paul Krugman may disagree, but I think that is the only reason we have gotten away with printing so much money for so many years.

    2. Lounsbury

      Probably correct, medecine now for a rebound is rather a better bet than trying to let chug-along on hopes it cures itself, which is a rerun of the broad errors of the early to mid 1970s.

  4. Lounsbury

    Precisely and 100% wrong, and a fine way to replicate 1970s policy errors.

    Panic of course no.

    Rebase aggressively, yes, to avoid the slide into 1970s similar entrenchments. The cure is not worse than the disease, although it like most medicine is not going to taste nice. Better a quick cure than a long disease.

  5. Spadesofgrey

    Lets also note, energy prices contained 75% of the increase in May. When that doesn't replicate in June, what then????

  6. PostRetro

    Inflation apparently is global, and unrelated to the what the Fed is doing, the ECB is doing, or what China is doing. What I think Biden should do is offer a tax incentive for all businesses to repatriate offshore funds into building r&d facilities and manufacturing in chips, sensors, AI, autonomous, photography, drones, planes, electric distribution parts, lithium mining and water desalination.

  7. D_Ohrk_E1

    The central bank rate is a blunt instrument at both ends of the economic trajectory. The Feds need a much wider assortment of tools at its disposal if we're going to rely heavily on the Fed to address economic conditions that politics will not attend to.

      1. jdubs

        This is true.

        The Fed can't do anything about worker shortages, food shortages or oil production shortages. But the Fed is charged with controlling inflation, even if they can't do anything about the causes.
        Personally, I am glad we had a Fed that allowed strong growth to continue fo many, many months beyond when the hawks started calling for demand destruction. Kevin incorrectly says that the Fed waited too long.....we should all be glad the Fed prioritized job and wage growth for so long when faced with supply constraints that they had no control over.

  8. LE

    I think Kevin gives good advice here. This controlling the inflation rate story sounds a lot like what I teach in process control class for processes with significant lags. The disturbance that generated this inflationary period happened a long time ago. The main effect of these interest rate increases are not going to be felt for a while. We are correcting for a long gone issue it seems.

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