Must-Read Pre-Liftoff Lollapalooza: Jon Faust: Liftoff? And then…

Must-Read Pre-Liftoff Lollapalooza: I find this from Jon Faust inadequate, mostly because if its failure to make even a bow in the direction of asymmetric risks. If the hawk scenario comes true, the Federal Reserve can then raise interest rates quickly to get to where it wants to be. If the dove scenario comes true, the Federal Reserve cannot lower interest rates far below zero and so cannot get to where it wants to be. Thus liftoff should wait until it is pretty damn clear that the hawk scenario is overwhelmingly more likely. And it is not overwhelmingly more likely now. The Fed is making a mistake. And Faust’s on-the-one-hand-on-the-other-hand without acknowledging the asymmetry in the situation…

Jon Faust: Liftoff? And then…: “The Fed’s policy projections going into the December FOMC last year showed a year-end 2015 median federal funds rate…

…of about 1.5 percent, with a range from zero to three percent. And the situation is almost the same this year: the funds rate is zero entering the December meeting, and the projections for year-end 2016 have a span of approximately zero to three percent, with a median just below 1.5 percent. More Groundhog Day than Christmas…. For the hawkish faction, the extraordinary accommodation that has long been in place is causing–or at least planting the seeds for–distortions and excesses, including inflation. In the main dovish scenario… any adverse development might be sufficient to push the economy into a pernicious deflation and require the Fed to dip deeper into the bag of unconventional tools…. By raising the federal funds rate now, the FOMC may counter some distortions and will make future rate increases less fraught should the hawk’s scenario come to pass. But raising rates inevitably entails some drag on Main Street…. What I’d most like for the holidays, of course, is for those projections of solid growth and accelerating inflation to come true, in which case we’ll all be toasting better times and more normal interest rates next holiday season.

December 15, 2015


Brad DeLong
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