In one year, the Fed has hiked its policy rate by 4.75 percentage points -- the fastest pace in forty years. To continue pushing would needlessly imperil the recovery.
What we need is better policy out of congress to help combat inflation rather than to just sit there and let the fed do the handy work. The rate hikes have done little to bring down inflation while actually boosting demand regressive stimulus to those with money by adding to deficit spending. I like to think easing supply chains have been more of a factor in the declining factor of inflation than the feds rate hikes.
Thank you, great article! I think I've read a bit of research about optimal monetary policy rules, but I've never seen and thought about the rate of changes as something crucial. Your article made me thinking about it. While I still need some time to process it through, I agree that it not only matters what is the terminal rate, but it also matters how we get there and how we communicate this. I guess it may depend on environment: leverage, labor market strength etc.
Great information and clarity. I believe we all desire a pause as the current Fed continues to consider the past to best place the giant monetary policy sledgehammer. Reminds me of how nice war can sound if we just use precise guided nukes...not too sane from a geopolitical/military standpoint and definitely the “throwaway” course of action (COA).
Having worked at the fed, can they ask for better/different data from BLS and other sources?
For example, BLS openings does not distinguish between full-time and part-time positions. This seems especially relevant with new minimum wage laws, uncertain economic environment, and WFH. Example: 1 FT position split into 2 PT positions = 1 unemployed person and 2 openings (job creation?). The reverse - a person quits 2 PT positions for a FT position = 2 new openings, but net +1.
Looking at FRED USPRIV dataset- there are 4.9 million more employed persons in Feb 2023 than in April 2019, with identical unemployment rate of 3.6%. Number of unemployed persons over the same period is basically flat, and openings have increased by 2.4 million. How does this make sense?
Lastly, BLS uses a survey of 22,000 businesses to get the openings data and respondents have to self-report acquisition. The 22,000 has not changed in a while, and we have had 3 decades of consolidation.
How does this work in practice and does it still make sense? Seems like a recipe for over-counting openings.
How does the BLS/Fed count a person who has two employers (2FT, 2PT, or 1FT/1PT)?
What if letting the effects of its rate hikes working through turns out to be just more inflation?
I’ll take Central Banks seriously when they recommend price controls. There’s far more evidence today of inflation being caused on the supply side than the demand side.
Don’t tell me there’s any intelligence or knowledge, Central Banks are blindly following a recipe and we all know what Volker cake tastes like - bitter and not very nourishing.
Looking on the less dark (I won’t say bright) side, it’s a step closer to winding up Central Banks and abolishing monetary policy.
Interestingly CB's of major countries have similar view on rate hikes in trying to tame inflation with rate setting. 2022 was a blast of hikes and CBs across the world raised rates. Here in India, CB finally hit a pause this week despite significantly high inflation (let's see what happens in future).
I think Fed is anxiously looking to make economy into some kind of landing. Fed for some reason does not favor "no landing" scenario for 2023. I guess Fed doesn't like this limbo of uncomfortably high inflation even when economy is in good momentum. Whether there will be a Top Gun landing? It's yet to see but there will definitely be a landing this year.
I think that making announcements of future policy unconditional on future events is wrong. I can see something like "If inflation continues to fall as slowly as it has in the last quarter and few signs of recession, then further increases in the Fed Funds rates may be appropriate." One might still disagree with that, believing the present level of the FF rate is sufficient and that the decline in inflation is sufficient and the risk of recession high, but at least that would be a disagreement about how to interpret data, not a disagreement about speculations about future data.
How much of a role do you think FX plays? I was thinking about externalities and how higher USD rates leads to lower foreign FX demand and the effect that has on the global economy and ultimately negative feedback loop for US
What we need is better policy out of congress to help combat inflation rather than to just sit there and let the fed do the handy work. The rate hikes have done little to bring down inflation while actually boosting demand regressive stimulus to those with money by adding to deficit spending. I like to think easing supply chains have been more of a factor in the declining factor of inflation than the feds rate hikes.
Thank you, great article! I think I've read a bit of research about optimal monetary policy rules, but I've never seen and thought about the rate of changes as something crucial. Your article made me thinking about it. While I still need some time to process it through, I agree that it not only matters what is the terminal rate, but it also matters how we get there and how we communicate this. I guess it may depend on environment: leverage, labor market strength etc.
Great information and clarity. I believe we all desire a pause as the current Fed continues to consider the past to best place the giant monetary policy sledgehammer. Reminds me of how nice war can sound if we just use precise guided nukes...not too sane from a geopolitical/military standpoint and definitely the “throwaway” course of action (COA).
I don't know what the Fed's going to do, but I'm guessing it's whatever the U.S. Oligarch's want/need.
Having worked at the fed, can they ask for better/different data from BLS and other sources?
For example, BLS openings does not distinguish between full-time and part-time positions. This seems especially relevant with new minimum wage laws, uncertain economic environment, and WFH. Example: 1 FT position split into 2 PT positions = 1 unemployed person and 2 openings (job creation?). The reverse - a person quits 2 PT positions for a FT position = 2 new openings, but net +1.
Looking at FRED USPRIV dataset- there are 4.9 million more employed persons in Feb 2023 than in April 2019, with identical unemployment rate of 3.6%. Number of unemployed persons over the same period is basically flat, and openings have increased by 2.4 million. How does this make sense?
Lastly, BLS uses a survey of 22,000 businesses to get the openings data and respondents have to self-report acquisition. The 22,000 has not changed in a while, and we have had 3 decades of consolidation.
How does this work in practice and does it still make sense? Seems like a recipe for over-counting openings.
How does the BLS/Fed count a person who has two employers (2FT, 2PT, or 1FT/1PT)?
What if letting the effects of its rate hikes working through turns out to be just more inflation?
I’ll take Central Banks seriously when they recommend price controls. There’s far more evidence today of inflation being caused on the supply side than the demand side.
Don’t tell me there’s any intelligence or knowledge, Central Banks are blindly following a recipe and we all know what Volker cake tastes like - bitter and not very nourishing.
Looking on the less dark (I won’t say bright) side, it’s a step closer to winding up Central Banks and abolishing monetary policy.
Interestingly CB's of major countries have similar view on rate hikes in trying to tame inflation with rate setting. 2022 was a blast of hikes and CBs across the world raised rates. Here in India, CB finally hit a pause this week despite significantly high inflation (let's see what happens in future).
https://www.reuters.com/markets/global-central-banks-deliver-historic-rate-hike-blast-2022-2022-12-23/
I think Fed is anxiously looking to make economy into some kind of landing. Fed for some reason does not favor "no landing" scenario for 2023. I guess Fed doesn't like this limbo of uncomfortably high inflation even when economy is in good momentum. Whether there will be a Top Gun landing? It's yet to see but there will definitely be a landing this year.
I think that making announcements of future policy unconditional on future events is wrong. I can see something like "If inflation continues to fall as slowly as it has in the last quarter and few signs of recession, then further increases in the Fed Funds rates may be appropriate." One might still disagree with that, believing the present level of the FF rate is sufficient and that the decline in inflation is sufficient and the risk of recession high, but at least that would be a disagreement about how to interpret data, not a disagreement about speculations about future data.
How much of a role do you think FX plays? I was thinking about externalities and how higher USD rates leads to lower foreign FX demand and the effect that has on the global economy and ultimately negative feedback loop for US