Must-Read: Bruce Bartlett: The Fed: Being Goaded into Raising too Soon?

Must-Read: I see three things going on in Federal Reserve desire to raise interest rates once there is even half an excuse to do so:

  1. A desire to placate members of the FOMC who believe that what is good for commercial bankers must be good for America, and who see higher interest rates now as good for commercial bankers.
  2. A belief that the normalization of the unemployment rate ought to carry with it a normalization of interest rates.
  3. Excessive trust in models with shaky empirical foundations that predict rising inflation in 2017 and beyond. As I have said, for too many members of the FOMC rising inflation is as tangible and visible and real as the peanuts handed out in small 70-calorie packages by Southwest Airlines pursers.

My suggestion: the Federal Reserve should invite Lars E.O. Svennson to come to every FOMC meeting and speak first. And the Federal Reserve should listen to him:

Bruce Bartlett: The Fed: Being Goaded into Raising too Soon?: “All year… markets have been expecting the… Federal Reserve to begin… normalising interest rates…

…An initial rise… expected in September… [was] derailed by a less-than-stellar jobs report. Now… December. The pressure to raise rates is a bit of a puzzle. Generally, the Fed raises rates… [to] curb inflationary pressures. But inflation is well-behaved, bordering on deflation… below the Fed’s own target of 2 per cent a year. And all the indicators of future inflation are signalling no sign of inflation…. So why is the Fed on the path to tightening? Some… believe… pressure… from banks having a hard time making money…. Another… the Fed has grown weary of the constant drumbeat of attacks from political conservatives who have been continuously warning about impending inflation, even hyperinflation…. When the Fed began its policy of quantitative easing… inflationary fears were often expressed here in the Financial Times by top Republican economists…. John Taylor… on March 24 2009…. On April 19 2009… Martin Feldstein…. Alan Greenspan… [on] June 26 2009 commentary…. [But] the policy that conservatives were concerned about was [the] textbook conservative macroeconomic[s of]… Milton Friedman… the conservative alternative to the Keynesian idea that government spending and deficits were needed….

What happened… conservatives… endors[ed] the ‘Austrian’ view propounded by Friedrich Hayek and others that the government should do nothing and just let economic imbalances right themselves. Friedman was always highly dismissive of the Austrian do-nothing policy, saying in a 1998 interview, it ‘has done the world a great deal of harm.’ The de facto adoption of the Austrian do-nothing policy by Republicans left no… Friedmanite[s]… except Ben Bernanke… [who] has detailed his frustration at repeated attacks on him and the Fed….

[T]he increasing hostility of the Republicans to the Fed and to me personally troubled me, particularly since I had been appointed by a Republican president who had supported our actions during the crisis. I tried to listen carefully and accept thoughtful criticisms. But it seemed to me that the crisis had helped to radicalize large parts of the Republican Party.

Today, Mr Bernanke no longer considers himself a Republican, having ‘lost patience with Republicans’ susceptibility to the know-nothing-ism of the far right’…. It’s rare for the Fed to tighten under macroeconomic conditions such as… today…. Perhaps the conservative critics are right, but it’s worth remembering that they have been predicting inflation for years and been proved wrong again and again…

October 9, 2015


Brad DeLong
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