For this morning’s column, I want you to engage in a little thought experiment. Based on the e-mails readers have sent, many of you figure the Dec. 15-16 Federal Open Market Committee meeting is a no-brainer and that the central bank will raise its benchmark interest rate. Well, let’s put that thesis to the test. To do so, I am making you, dear reader, the chairman of the Federal Reserve. The setup for our barely hypothetical scenario is as follows:
Imagine (it’s not that hard to do!) that a huge financial crisis and economic collapse has occurred. The historical response to a crisis like this has been a combination of fiscal and monetary stimulus to replace the decline in household and private-sector demand. But this time, political gridlock and ideological foolishness made the usual fiscal response impossible. That left monetary policy — mostly asset purchases via quantitative easing and zero interest rates — as the sole post-credit-crisis stimulus.
Continues here: You’re the Fed Chairman. What Would You Do?
Given that without accompanying fiscal stimulus monetary policy has had weak effects, I don’t see that a quarter point either way makes the slightest difference. I wouldn’t sweat the decision… it is of little consequence despite all the play given it in the press.
What would YOU do?
I would wait until after the elections which will flush the “you know who” out. Then, raise rates while, at the same time, implementing fiscal stimulus with infrastructure spending.
Literally give money away.
If you give a $20 bill to a poor person, they will spend it. Very high velocity for that money.
I would give $20 bills to people in the street. Billions.
Thats what BR meant when he said lack of Fiscal response.
Federal government spending and hiring is just that !
The only way for the Fed to do that is to arrange for some accidents with armored cars transporting cash so they open up in the middle of a street and blow their cash out. Otherwise, they need to route their money through the big banks who get first dibs on what to do with it, which is not usually giving it to poor people.
The 25 bp increase is already baked into the economy and dollar exchange rate. To actually institute it will not do any additional harm. It would probably be more harmful if they did not increase the rate. So I would increase by 25 bp.
The biggest danger to the US economy is from the damage induced by expectation of 25 bp every 2-3 fed meetings for the next few years. Given that no other major economy would follow us, that would be a disaster – yet it appears that there are expectations of that. And as we have seen in the past 3 months, damage to the economy (exchange rates) can be driven by expectations.
The question is what kind of message is delivered together with the 25 bp increase. The fed needs to get ahead of expectations and signal that the rate of increases to come will be far from normal. This could either be done by stating that the fed “has highly effective tools to deal with inflation, should it exceed the target rate”. Alternatively, they could state that “additional rate increases will depend on clear indications of a sustainable elevation in inflation rates above the target”.
The CPI is already exceeding the Fed’s target rate if you remove the 25-30% drop in fuel prices, which are not economic but geopolitical. That masks 3% gains in medicine, rents, and food. The rate of inflation is near zero ONLY because of the oil price collapse which is not due to any collapse of demand, but excess supply because of dumping by Russia and Saudi Arabia. Go to the BLS web site and look at the components, not just the headline rate.
100,000 fracking wells in the USA are Geopolitical?
Fuel prices are an important driver of a lot of other prices (because fuel is part of the cost of most products and services). However, that does take some time to reach through. The increased value of the dollar is also deflationary and take some time to get its full effect on prices. So I do not agree that we are sustainably above the target at this time. We need at least another 4-6 months before we can fully evaluate whether inflation will be sustainably above target. Raising rates when the rest of the world are not – is very risky business because it kills export.
Russia and Saudi America opening the spigots wide open in the face of a glut is geopolitical.
In the case of the Saudi’s they are probably trying to break the fracking wells to keep their control.
The Russians either want to break the MidEast or desperately need the foreign exchange or both.
“Imagine you are Federal Reserve Chairman: What Would You Do?”
Throw a gigantic f—–g party, cuz I’m as rich as ell?
Fed chairs aren’t rich until they leave and write books and give paid speeches to bankers. Until then they are still largely well-paid academics.
The Fed does not use the CPI; they use the PCE, which increased 1.28% year/year through October. Still well below their 2% target.
If I were the Fed chair, I would say no to the 25 bp increase, then I would go on a student loan buying binge and promptly cancel the loans. Obviously, lagging indicators are lagging and leading are leading the way down. The one exception is the yield curve hasn’t flattened, but that actually is more concerning. The yield curve only flattens when economic strength causes short term rates to rise. There’s not enough economic strength to flatten the yield curve!