Must-Read: William Spriggs: Trying to Teach Old Dogs New Tricks

Must-Read: The conventional wisdom in the communities in which I sit is that commercial bankers are being extremely stressed by the fact that interest rates are so low and they cannot charge for deposits. The longer-run point that raising interest rates may well crash the economy and crash the value of their loan books appears to be something that is not in the forefront of their minds. And the conventional wisdom is that regional Federal Reserve bank presidents respond to this stress.

What I do not understand is why the regional Federal Reserve bank presidents are not enormous and vocal advocates of a higher inflation target. Their loan books are not long enough (housing aside, and that risk has been laid off) to seriously suffer from expropriation-via-moderate-inflation. A higher inflation target that boosted the economy would actually improve the quality of their loan books. And it would provide a wedge between short-term real interest rates and the zero bound.

So why not?

William Spriggs: Trying to Teach Old Dogs New Tricks:

Last December, after a long period of keeping the Fed funds rate near zero, the FOMC voted unanimously to raise the Fed funds rate by one-quarter to one-half points….

It was anticipated that would be the first in a series of increases of similar small amounts. But, over the course of this year, the economy has run rather flat…. In 2015, the unemployment rate fell from 5.7% in January to 5.0% in October. It has since remained stuck at about that level…. Eight months of flat unemployment rates and tepid GDP growth would suggest the Fed has clearly succeeded in finding a landing that, so far hasn’t meant crashing the economy. At least, on Wednesday, the evidence from modest GDP growth, flat unemployment and very low inflation convinced the six Board of Governors and the president of the New York Federal Reserve Regional Bank to hold steady; a tribute to Janet Yellen’s leadership to stay focused on the data and the real economy.

But… three regional bank presidents, Esther George of Kansas City, Loretta Mester of Cleveland and Eric Rosengren of Boston, all voted to raise the rate now… [with] other major world economies, Europe, Japan and China… struggling with slow growth… [and] operating with either zero or negative interest rates. America’s modest growth looks very good next to their anemic performance…. This is making the dollar very strong… weak[ening]… U.S. manufacturing because a strong dollar hurts U.S. exports…. The current tension in the FOMC between the Board of Governors and the regional bank presidents continues the controversy whether banks have too much say. Independence of the Fed from the political process is important. But, so too is Fed independence from the banks they need to regulate…. The vote from Wall Street was positive. The stock market gains show a consensus the Fed is doing it right.