Here’s their
story in a nutshell.
President Trump has restored growth to the US economy. Along
with the growth, the inflation rate has been pretty much subdued. The Fed
worried about inflation nevertheless, and this caused financial chaos as the
Fed raised in interest rates. There was a collision of foreigners wanting more
dollars while the Fed was removing them. Even though the Fed announced a halt
to future interest rate increases, the damage to growth has been done and
growth has not resumed. The Fed should lower interest rates now to get growth
back on track.
Yikes…and
Goldilocks lived happily ever after.
It all
sounds pretty good but does not pass scrutiny. JD always brings clarity to such things.
First, let's remember
that the Fed’s mission was to restore some normalcy to interest rates. As a doddering
old fool, I am among many Baby Boomers who live off interest. I guess M&W have their money invested in gold
or bitcoin or something exotic, or they might have noticed how the spending power of
all these people has been damaged through all these years of low rates. Just like
Goldilocks wanted her porridge just right, the Fed needs to make interest rates
just right. That means raising them.
Second, the conclusion
that the economy has been harmed and that the announcement to stop raising rates
has not produced growth is silly. Do these guys think that growth just pops
around every time the Fed talks about a policy? The markets might get hysterical
for a day or two but come on. Growth hasn’t come back yet? Give it time. The
world has not ended.
Third, why
give so much blame to monetary policy for the lack of response of growth. Do
these guys read the newspapers? The whole world is growing slower and it doesn’t
have squat to do with our Fed. Clearly, China is slowing down and what is going on
in Europe has little to do with Fed policy. It mostly has to do with expectations
regarding a tariff war or economic problems in those parts of the world.
Fourth, is
there no amount of money that will satisfy these guys? I’d like to remind them
that banks are sitting on mounds of money in their excess reserves. Despite the moaning about high interest rates, interest rates are low. Interest rates are
low because money is quite ample.
Finally, the
markets don’t expect inflation now? Fine. Did they expect it 1961 when the
inflation rate was less than 1%? Did they expect it in 1971 or in 1976? I don’t
think so. Inflation has a very cunning way of jumping out at you like a black
cat in the night. And it usually does that not long after "important economists" tell everyone that we need to flood the economy with lots of money.
Reducing
interest rates right now is insanity, especially if insanity is defined as doing
the wrong thing over and over despite the negative results.
First, Trump had little to do with the curve of economic growth. That was already in place on it's own starting in the latter part of the Obama years who also had no real influence over it. I saw the article this AM. ROI means nothing any more in calculating business decisions feasibility. Too much control over a rate leads to a meaningless rate.
ReplyDeleteToo extreme Hoot. You are in a very small minority if you think Trump had little to do with growth. Interest rates are powerful relative prices in our economy. Not sure what you mean by too much control or meaningless.
DeleteDear LSD. The stock market normally moves inversely to interest rates but lately that relationship seems more reactive/sensitive . . . . volatile even. Should rates decrease as M&W say it likely wouldn’t be more than a few basis points and despite the market’s propensity to react to rates any movement would be negligible. Nothing to write home about there. A yawner.
ReplyDeleteChina/Europe are slowing and talking headz say that’s affecting us, too. Yet you say the Fed should right rates via higher. I’ve read the Fed weally doesn’t know what the “right” rate should be, do you? Seems counter intuitive to raise rates in the face of likely/impending econ slowdown, but do you know or have insider-trading poop that sez inflation is about to pop out’a the hat like a black bunny? Or do you simply want higher rates to augment all the kool kash you’ve stuff’d in your mattress?
Popping out of a hat is meant to be a surpse. That's the problem. It is almost always a surprise. But it happens over and over because so-called well meaning liberals think they can fine tune the economy with lower rates. Its voodoo. Let the rates rise to something more normal and we all be better off.
DeleteWhy do I get the feeling that too many people equate the economy with the stock market?
ReplyDeleteMy understanding is that growth has slowed in large part because we're at near full employment. There aren't enough people for jobs available. 'At rat thar is a growth slower.
I'm one of those older than dirt guys living off interest and dividends. Right now, all I need is a cup of coffee and about $4 million.
Growth has not slowed because we are near full employment. In fact growth has not slowed unless you want to take one quarter as your evidence. Read the employment figures -- employment is not the problem. The labor force participation rate has been rising. Not falling. Play the lottery. :-)
DeleteThe comment function is not working. So I cut and pasted
ReplyDeleteTuna's comment here -- Hey, old dirty man (as opposed to dirty old man). Wutz wrong with equating the economy with the stock market? Economy does good = higher earnings = higher stock prices, eh? Economy does not so good = lower earnings = lower stock prices, eh? Doesn’t that suggest some correlation, eh?
Do a regression of stock prices on some measure of the economy. I doubt the correlation is as strong as you imagine. But that isn't the same point you were making before....about interest rates and the economy. I doubt that a prudent policy of slowly raising the fed funds rate will have any negative impact on the economy now or in the near future.
DeleteDear LSD. There is a correlation between stock prices and the economy but I do not consider it robust. The ROI of doing regression analysis competes with my other time-consuming activities such as Ouija boarding and finger painting so I’ll hazard a guess on the r factor = +.50 – +57.
DeleteI like your approach to quantitative economics Tuna. You must have learned your econometrics at Ponce de Leon junior high school.
DeleteNaw-w-w-w-w-w, attended South Miami Junior High home of future/aspiring juvenile delinquents where we learned Econ 101 (supply ‘n demand curves) by robbing Peter to pay Paul. Peter had the dough and Paul demanded it or he would break our knuckles with stolen hubcaps. We learned macro from Paul who parlayed the hubcaps via a free-market flea market into a vibrant/profitable pawn shop.
ReplyDeleteThe edukational/growth curve was phenomenal. Paul is now spending time with Bernie Madoff.
How can one reply to that? So I won't.
DeleteBest you don’t, Paul might take issue with it.
ReplyDeleteThe stunning feature of the S&W editorial is their belief that the money supply has something to do with the real economy. It may at the extremes but what the Fed does has nothing to do with growth. It is bizarre that the Wharton grad wants to name Moore to the Fed Reserve. I wonder how he will survive getting beat up by real economists? (I mean that literally-- he needs many punches in the mouth)
ReplyDelete