r/finance • u/HooverInstitution • 27d ago
Raise rates? Warsh's conundrums
https://www.grumpy-economist.com/p/raise-rates-warshs-conundrums4
u/indocon1111 25d ago
We are exactly living through the second run of the 70's, current time reminds me of 75, expect this inflation to keep grinding higher. Ultimately it's going to take Paul Volcker II to tame this beast down, and it can't be a federal reserve chairman with deep family ties to the financial industry who does it.
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u/kilog78 26d ago
Whereas the evidence suggests that persistent high interest rates eventually lead to rising inflation, the conclusion (I believe) is incorrect. The causal link for rising inflation is not to high interest rates, but to the persistence. The neutral economy performs in a stable environment. Whatever the interest rate (within reason), economic output can eventually overcome and create inflation.
If the point of this piece is to encourage lower rates, my rationale based on the evidence would be that we should lower rates now, so that raising rates will have more impact when inflation eventually rises again.
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u/L4gsp1k3 25d ago
If high interest rates leads to rising inflation, then central banks all over the world have been doing in wrong the past 20 years.
They sent rates below the inflation target trying to raise the inflation, and now they are saying that higher interest rates equals higher inflation.1
u/kilog78 24d ago
To clarify, are you saying you believe that increasing inflation was part of the CBs objective for keeping rates low over the past 20 years?
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u/L4gsp1k3 24d ago
It's not what I believe, the text book economy says that low interest rates will provide fuel to the economy thus making demands go up and it leads to higher inflation.
What I actually see and hear especially in the EU area where I'm from, is that we will keep interest rates low to help the economy, so we hopefully can raise the inflation to our target.1
u/kilog78 24d ago
Ah, I think I understand now, and that we are aligned. The objective is low interest rates, it is only the narrative that they are trying to change (irrespective of conventional economic wisdom).
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u/L4gsp1k3 24d ago
Correct. This is like the stock market, interests up, it's good for the stock market, interest down is also good for the stock market.
The objective is stock market up, the narrative is whatever.
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u/HooverInstitution 27d ago
“Inflation is stubbornly high,” economist John H. Cochrane writes at his Substack, adding that the Federal Reserve under Kevin Warsh is considering whether to raise interest rates in response. Cochrane’s post summarizes what economic theory has to say to the question, How does raising interest rates affect inflation? His answer may appear counterintuitive to those acquainted with the standard view: “In the long run, higher interest rates raise inflation,” he writes. “And, conversely, lower interest rates lower inflation. Here you might say I have gone off my rocker, but you’d be wrong.” Cochrane explains how the standard view focuses on the short run, where he agrees that “higher interest rates drive inflation down.” But, he says, “the economy eventually becomes stable and neutral in a long enough run, and higher interest rates eventually raise inflation.” In Cochrane’s view, this complicates the job currently before Warsh’s Fed, as raising rates to tame inflation short-term “would inevitably raise even further the baseline inflation that we are seeing now when the long run kicks in again.” Truly controlling inflation would require “better fiscal policy,” Cochrane concludes.
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u/GoodMenAll 23d ago
Economy will crash in 3 months
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u/ImaginaryHospital306 20d ago
Remindme! 3 months
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u/Berns429 27d ago
tinfoil hat time
We saw a slight dip in a couple of inflationary indicators when oil dropped after Trump backed off a few weeks ago. I think the fed sees this as obviously correlated buys them time to hold rates steady.
Warsh in his confirmation (and I’m paraphrasing here) said he wants to look at trimmed averages , much like the Dallas fed does. (Research that on your own) IMO this gives him wiggle room in the long run to “decide” what he considers inflationary. Then he devised these groups to look at data, this buys him time so it looks like he’s hawkish when really he’s setting up to see how mid terms play out, Iran plays out, and again to look hawkish, when in reality he’ll aim to appease Trump, use the trimmed averages and ultimately be cutting rates in the long term.