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Sanjeev's avatar

Nice post.

Somethings i don't get. While high inflation is bad, what is the calibration benchmark? Why does Fed keep touting the commitment on "2%" target? What's the merit/basis of this magical mark of 2%? Economy as a whole is highly complex and keeps changing all the time. So why does CBs stick to a particular mark of 2% all the time? If i am not mistaken, Stiglitz recently said that global economy has to undergo transformation (to address energy needs, climate change etc) and 4% might be a new normal during this intermediate period while we transform.

Also something about cost of living and demand. The Fed raises rates in a hope that it will re-calibrate demand and curtail spending on specific set of goods & services. But by raising rates, the other set of things can become costlier - interest payments of housing/auto/business loans etc. So basically cost of living or cost of doing business stays high or can become high. So while intended goal of CB is to cure inflation, it is burdening the consumer/labor/businesses with higher costs on different end. Like i have a pain in my leg, Doc gives me medicine that will cure my leg pain & transfer it to my arm!

Here in India, our CB is also raising interest rates and monthly interest payments on housing loans have become costlier by as much as 20%. There is some small decline in commodity inflation (which our CB likes to take credit for!) but ultimately the economy is now suffering from different ways as households/businesses become more burdened with higher payments on debt. So how does CB plays the balancing act?

Of course the fiscal policy and strategic planning on various fronts is the key. That should be our main focus.

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Michael Bostic's avatar

I'll share this on Twitter later on, this is another solid piece here. With regards to fiscal policy, yes congress is going to have to do more (with a divided congress likely won't happen) but two things we can talk about that will help are the Federal Job Guarantee and also the Green New Deal. Botton line, indeed the federal reserve alone is doing its best to start a recession and that's just plain wrong.

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