Must-Read Pre-Liftoff Lollapalooza: Financial Times: The Federal Reserve May Be Jumping the Gun

Must-Read Pre-Liftoff Lollapalooza: The Financial Times editors argue that the Federal Reserve is making a mistake with tomorrow’s liftoff of interest rates.

They are right.

The only wrong thing they say that I see is their statement that “it would probably be more disruptive if the Fed sat on its hands”. The Fed is likely to have to break its policy commitments at some point because its policy commitments are dangerous and faulty. Given that, the least disruptive moment to break them is now. Breaking them later will only be more disruptive.

Financial Times: The Federal Reserve May Be Jumping the Gun: “Just because it seems inevitable does not mean it is a good idea…

…The Federal Reserve’s Open Market Committee, which on Wednesday announces its decision on interest rates, has widely telegraphed that it will raise borrowing costs for the first time since 2006 after seven years on hold. Janet Yellen, the Fed chair, has apparently overcome opposition from some more dovish members on the central bank’s governing board…. The Fed will, on balance, be moving too early…. The value of waiting outweighs that of acting now…. Year after year, the Fed… has overestimated inflationary pressure, suggesting either a miscalculation about the economy’s output capacity or something even more fundamental going wrong. While American unemployment is low… the US’s number of economically inactive people [is high]… discouraged workers who have left the labour market never to return, or they may be people who would start looking for a job if the offers were there…. With consumer price inflation having undershot its informal 2 per cent target for so long, there is a good case for remaining behind the curve until it is quite clear which way the curve is moving.

Having come this far in signalling that interest rates are about to rise, it would probably be more disruptive if the Fed sat on its hands on Wednesday than if it moved…. Yet at the very least it should do its utmost to make clear that this is not the first in a series of preordained interest rate rises. In that sense, too, it needs to make a break with historical precedent in which the first US rate rise is reliably followed by a string of further moves. If it does raise rates, the Fed should signal that it stands ready to reverse course…. The central bank should leave interest rates on hold this week.

December 15, 2015


Brad DeLong
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