Must-Read: Lawrence Summers: Why the Fed Must Stand Still on Rates
Must-Read: What is the technocratic economic–not the “the unemployment rate is normalizing so the interest rate should be normalized too” argument? For a person to be lying in a bed 24/7 is not normal. But if they have a broken leg you don’t make them normal by making them get up and walk around.
: Why the Fed Must Stand Still on Rates: “The case against a rate increase has become somewhat more compelling even…
…than it looked two weeks ago…. First, markets have already done the work of tightening…. Second, the data flow suggests a slowing in the U.S. and global economies and reduced inflationary pressures…. Third, the case for concern about inflation breaking out is very weak. Market based expectations suggest that inflation over the next decade on the Fed’s preferred core pce basis is near record lows and well below 2 percent. The observation that 5 year inflation, 5 years from now is expected to be below target calls into question arguments that current low inflation is somehow transitory….
Fourth, arguments of the “one and done” variety or arguments that the Fed can safely raise rates by 25 BP as long as it’s clear that there is no commitment to a series of hikes are specious. If as some suggest a 25 BP increase won’t affect the economy much at all, what is the case for an increase? And when the same people argue that 25 BP will have little impact and that it is vital to get off the zero rate floor, my head spins a bit. In a highly uncertain world, the Fed cannot be both data dependent and predictable…. I understand the argument that zero rates are a sign of pathology…. The problem is that the case for hitting the brakes in an economy with sub-target inflation, employment and output is not there; regardless of whether the brakes are to going to be pressed hard or softly, singly or multiple times…. Policymakers who elevate credibility over responding to clear realities make grave errors….
Fifth, I believe that conventional wisdom substantially underestimates the risks…. Not a single post war recession was a predicted a year in advance…. If history teaches anything it is that financial interconnections are pervasive and not apparent till it’s too late…. Now is the time for the Fed to do what is often hardest for policymakers. Stand still.