Must-Read: Tim Duy: This Is Not a Drill. This Is the Real Thing

Must-Read: Again. I do not understand Janet Yellen and Stan Fischer’s thinking at all. A 25 basis-point rate hike is a small contractionary thing. But it is a thing. The credibility gained by sticking to a bad policy long past the point where its badness ought to have been recognized is not the credibility worth gaining. The rest of the world is shaky–and the last thing it needs is to have risk-bearing capacity pulled out of it by a U.S. rate hike. And whatever interest-rate hikes might be made this summer could be made up with ease next spring, after the situation becomes clear.

Yet they continue:

Tim Duy: This Is Not a Drill. This Is the Real Thing: “The June FOMC meeting is live…

…That message came through loud and clear in the minutes, and was subsequently confirmed by New York Federal Reserve President William Dudley…. Boston Federal Reserve President Eric Rosengren… gave a strong nod to June…. The Fed broadly agrees that the economic recovery… is sufficient to drive further improvement in labor markets…. Still, the risks are [seen by the Fed as] either balanced or to the downside….

The Fed’s plan had been to let the economy run hot enough for long enough to eliminate underemployment. One sizable camp within the Fed thinks this largely been accomplished…. The Fed is also split on the inflation outlook but most believe inflation is set to trend toward target…. June is on the table…. There is a rate hike likely in the near-ish future…. I think we narrowly avoid a rate hike, but at the cost of moving forward the next hike to the July meeting.

May 23, 2016


Brad DeLong
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