Ramesh Ponnuru says Elizabeth Warren might be responsible for high inflation:
In 2021, Senator Elizabeth Warren (D., Mass.) led the fight to keep President Biden from reappointing Jerome Powell as chairman of the Federal Reserve.... Former Fed official Randal Quarles has said that uncertainty about the Fed’s leadership delayed the central bank’s response to rising inflation.
A more halting Fed response likely led to inflation rising more, and subsiding more slowly, than it otherwise would have.
I assume Ponnuru isn't being especially serious about Warren, but he is serious about the Fed fighting inflation. I sure wish we could put an end to this. I mean, the facts are the facts:
I'm using core PCE inflation because this is allegedly the Fed's favored measure of inflation. It peaked in December 2021 and then started declining. But the Fed didn't start raising interest rates until three months later. Inflation was already coming down on its own as supply shortages eased and pandemic stimulus ended.
Did the Fed's interest rate hikes at least help things along? Maybe, but I doubt even that for three reasons. First, interest rates rose above 3% in October 2022. Inflation was basically conquered by July 2023. Nine months just isn't enough time for an impact that large. Second, interest rates peaked in mid-2023 and stayed high for more than a year. But during this time inflation didn't budge even a hair. Third, there was never a recession or even a slowdown. How does monetary policy affect inflation without first affecting the economy?
I'll admit that if I had been in charge of things I would have raised interest rates too—but slowly and steadily. It can't hurt to make sure, right? And in fairness, things weren't as clear two years ago as they are now.
But they are clear now: The Fed raised interest rates, causing economic pain to millions, for nothing. There was never any need for it.
I don't buy that there was never any need for it.
How do you know that inflation wouldn't have stayed around 4% in the absence of rates? Are you omniscient?
I do think the Fed has gone too far, and went too far, but I don't think they went THAT far too far. Maybe 1% too far at most.
It is his Article of Faith
A bald faced assertion because he is unable to admit the Transitory was wrong....
Given internationally one can look at the cases of Central Banks not taking action in rate rises and see inflation escalating.
Regardless from an econometric PoV this all is entirely nonsensical as rate rises can not both do nothing on inflation and also cause recession as fundamentally price rises are about supply and demand imbalance and unless one is raising supply one has to be restraining demand (which may not be directly observable demand 'destruction' if such rate rises are pushing against counter factors pushing up demand, as like fiscal stimulus).
"Article of faith" is exactly what I was thinking. Specifically, the belief that Fed rate changes can't affect inflation as quickly as nine months, and the belief that rate changes can only curb inflation by creating a recession. Strangely, Kevin Drum blames the rate hikes for causing economic pain, while insisting they did not meaningfully affect the economy.
I think that's because he's still stuck on equating that rates take a year-ish to "fully filter through the economy" with "doesn't have an effect for like a year, guys." At this point I don't remember why/how/when that became Drum's obvious belief, but it's apparently unshakeable.
I'd even say I was more on team transitory than not. I still think the Fed should have raised rates, just not nearly as much as they did and that they should have brought them down sooner than they started to.
Can you point to a few examples of 'Central Banks not taking action in rate rises and see inflation escalating' during this particular worldwide episode? Or perhaps even other, similar worldwide supply crunches in the past?
Or....are you just making 'Article of faith' 'bald faced assertions'?
It must be a terrible burden knowing everything and having to explain it to everyone, all the time.
Regardless from an econometric PoV this all is entirely nonsensical as rate rises can not both do nothing on inflation and also cause recession
I suggest reading Kevin's post again, this time with the goal of comprehension. He never said that interest rate increases both did nothing on inflation and also caused a recession. In fact, he said the exact opposite. The fact that they didn't cause a recession is evidence that they also didn't help with inflation.
I find it amusing how many economists here don’t believe that the interest rate hikes has little economic impact, it falls within the old proviso “are you going to believe me or your lying eyes”. I think what’s happening is that economist think their trade is a hard science and not a social science. But because it is mainly a social science, it means that the exact quantifiable circumstances yield to different results whereas in real science each experiment or situation is exactly replicable.
It has an effect.
But it doesn't affect the price of eggs or having your Christmas shipments arrive the following March.
That is simply false, simplistically false.
Rate rises effect demand, overall.
Price of eggs of course is a matter of supply balance and overall pricing pressures (of which indirects such as labour, such as transport, such as inputs) - the feed through channels are indirect but they do effect.
None of this is mysterious as one can see what happens in markets where inflation started and Central Bank did not take rate actions or took late
Of course Party Political Partisans hate admitting own-side error so bizarre unfactual denialism sets in.
Why'd they wait a year instead of chasing inflation around? It'd have had more effect if the changes were quicker and more punishing to the banks to keep up with.
"Randal Quarles said..."
* googles Randal Quarles *
lol. ok
The free money era of 0% interest rates had its own pathologies. 4% interest is historically speaking extremely modest and gives us actual wiggle room.
Quite - the long-term pathology and distortion of the 0% era fed through all kinds of asset classes (to the overweight benefit to leveraged asset owners).
the idea that 4% is some great catastrophe is just... bizarre, it is a return to more normal levels (and in the medium term will certainly be healthier - of course ANY changes will always cause howls - people hate observable change)
Addiction to cheap money is difficult to overcome.
Of course more ironic is the October figures showing rebound on US inflation rises to 2.6% (https://www.ft.com/content/57597860-419a-4d34-946a-90f4c698def3) which echoes historical patterns of 2ndary feed-through and rebounds which in Central Banking world has been a concern.
now Drum would have like the US Fed to play Erdogan games but had they done that USA would almost certainly have ended up with perverse results
2.6 is a very average number over the last 2-3 decades.
Pretending that this rate is concerning or that you have any idea what the 'perverse results ' would have been is kind of a dumb take. Even you must laugh at your all-knowing schtick sometimes.
I just had a vivid image of Lounsbury being Matt Gaetz, laughing.
one more comment about the overall economy, inflation and the election. Most of Gen Z and early millennials don't remember a truly bad economy like 2007-2008. Following the subprime mess we had steady growth, low inflation and decent job growth. I think they really bought into Biden had a horrible economy not taking into the pandemic effects on supply chain disruptions and other factors out of Bidens control
I think you mean younger millennials, not early millennials. Those of us more towards the early side absolutely do remember the 2000s.
And the 2010s. The 2010s also fucking sucked. Does nobody remember sequestration and Gangs of Six (or whatever) and Grand Bargains about the deficit because of the inflation bogeyman? If there was ever a time for modest and sustained (up to about 4% or so) inflation (not the short-lived spike to 6%ish we just got), it was the early 2010s. Instead of giving money to real people who needed it in 2009-2014ish, we were forced to listen to dumb fucks like Larry Summers or Alan Greenspan or Simpson Bowles (or was that 2 people? I don't know - these fucking guys are all interchangeable and they all have affluenza) go on and on and on about how inflation was just really bad OK and we can't have any of it, so we can't help real people with real money. That led directly, even if not solely, to Trump and MAGA.
"The Fed raised interest rates, causing economic pain to millions, for nothing. There was never any need for it."
Well, Trump wasn't going to elect himself. He needed prices to go up and then interest rates to go up as prices refused to go back down, so that everyone from lowly peasant to aspirational millionaire would be pissed off this year. Worked like a charm.
The Fed chair was reappointed by Biden, and half the board. They were useful idiots and quislings respectively?
So what you're saying is:
the increased Fed rate caused consumer pain...
but had no effect on inflation...
but you would have raised it, too, just slowly...
because it might have had some effect on inflation...
but without causing consumer pain.
😐
Clearly rates could have risen less sharply amd stopped at a lower level. A slow rise to 2 or 3% would have had a very different impact on peoples lives.
This isnt complicated.
The current 2.5% inflation is pretty ideal. The Fed rate should be 3.5% give or take twenty-five basis points. The rate climbed too fast and too late to have any real impact but, it is true that the Fed had been holding rates too low for too long.
You present a counterfactual that is macro heterodoxy.
If raising the rate slowly presents less harm to consumers, then by definition, it also has limited effect on inflation.
The Fed is always going to rapidly raise the rate if inflation shoots up, and when inflation is slowly growing above their target, they'll slowly raise the rate.
My argument was always that the economy was strong enough that it could absorb rates that were at least as high as they were in the mid-90s, and if not, then there were structural problems with our economy.
Considering that we just had an election in which one of the major points was the inflation rate, NOT the unemployment rate, we will probably not have full employment again in my lifetime but we will very definitely have high interest rates at the slightest sign of creeping inflation (unless Trump takes over the Federal Reserve and chaos reigns).