Must-Read Pre-Liftoff Lollapalooza: Harriett Torry and Jon Hilsenrath: Lesson for Fed: Higher Interest Rates Haven’t Been Sticking

Must-Read Pre-Liftoff Lollapalooza: Why does the Fed think that it will be different, and not desperately want to lower interest rates in two years, but be scared to admit it made a mistake? Much better to wait until you are sure that you will not have to return to zero in short order. Yet, somehow, that asymmetric-risks argument does not have purchase within the Fed…

Harriett Torry and Jon Hilsenrath: Lesson for Fed: Higher Interest Rates Haven’t Been Sticking: “Central banks in the eurozone, Sweden, Israel, Canada, South Korea, Australia, Chile and beyond…

…have tried to raise rates in recent years, only to reduce them again as their economies stumbled. Central-bank U-turns on rates in recent years had different causes and consequences…. The Bank of Israel, under Stanley Fischer, who is now the Fed’s vice chairman, was among the first to move. It started raising rates from 0.5% in September 2009, just as a global recovery took hold, pushing them up to 3.25% by May 2011. With Israel’s economy buffeted by Europe’s downturn and global inflation slowing, Mr. Fischer’s successor, Karnit Flug, has since pushed rates back down to 0.10%. Two central banks that haven’t raised rates since the crisis—the Fed and the Bank of England—have enjoyed stronger recoveries than others. Their patience might pay off. Their economies might now finally be healthy enough to bear higher rates…. “Tightening too early can have very large costs, as it has had in the Swedish case,” said Lars Svensson, who quit as Riksbank deputy governor in 2013 in protest at the bank’s policy decisions…

December 15, 2015

AUTHORS:

Brad DeLong
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