Must-read: Duncan Black: “Time To Increase Interest Rates!”

Must-Read: And Duncan Black comes up with a very good phrase to describe what we think the Federal Reserve is doing based on what we think is its misspecified and erroneous view of the inflation process: “taking away the punchbowl before the DJ even shows up to the party”:

Duncan Black: Time To Increase Interest Rates!: “As I’ve said, I don’t think small upticks in interest rates by the Fed…

…will really destroy the economy. They just signal that the Fed will never let wages (for most of us) rise ever again. They’re taking away the punchbowl before the DJ even shows up to the party. Killing inflation is easy and you don’t have to pre-kill it. The best argument for Fed actions is that they need to increase rates so that they’ll be able to decrease them again if the economy sours. There’s a bit of an obvious problem with this reasoning. Exciting days at the dog track probably do get their attention. Wonder why that is.

Graph 5 Year 5 Year Forward Inflation Expectation Rate FRED St Louis Fed

How many FOMC members would have voted to raise interest rates back a month and a half ago if they had known that from then until now would say a 50 basis-point downward lurch in the 5-year ahead 5-year forward inflation breakeven? 4? 3? 2? 1? If they do not reverse that December rise at the next FOMC meeting, it seems as if something is wrong…

January 21, 2016


Brad DeLong
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