Wednesday, March 15, 2017

The Fed will probably raise interest rates today, and that matters more than the Trump partial tax return non-story

Yeah, that non-story last night was a bust.  What matters?  Today, the Fed will probably raise interest rates.  They haven't been doing that a lot lately.  As in, they haven't been doing that much for basically a decade.  You can get the economics story from an economist, but I thought I'd talk about the political science behind the economics.

Basically, the Fed is supposed to lower interest rates when inflation is too high, and raise it when inflation is too low, based on the premise that there is a tradeoff between inflation and unemployment.  What inflation rate are they supposed to target?  The "NAIRU."  It has a really cool jacket.  It stands for "non-accelerating inflation rate of unemployment."  What is the NAIRU?  Um... we don't really know.  So, what they actually have is a target rate of inflation of 2%.  How's inflation looking?  Here's the graph going back to just before the Great Recession.



See how we're just shy of 2%, and only barely crossed over the threshold a few years ago?  Funny, that.

Now, I promised something more like political science.  Here it is.  Who has the burden of argument when dealing with a rate hike: those arguing for it or against it?

The Fed will probably raise rates today because the burden of argument has been placed on those arguing against a rate hike.  Rates are lower than their historical norms, and advocates of a rate hike have insisted that rates return to those norms in the absence of a compelling argument to the contrary, like high unemployment.



Nope, not there.  But, if the burden of argument is on those arguing for a rate hike, the burden is on those looking at the inflation numbers, and with inflation below target, there's no reason to hike.

Inflation isn't accelerating, so the Fed isn't targeting the NAIRU, and inflation is below its target, so raising rates before it hits that target runs counter to that goal too.  The Fed is probably raising rates because the burden of argument has been placed on those arguing against the rate hike, and they have been unable to make the case.  This isn't an action taken for the sake of economics.  It is an action taken for the sake of political science.

4 comments:

  1. And the burden is on "against" because everyone can see that Trump is going to try his damndest to make future cuts necessary.

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    1. Not really. He wants to cut taxes, which should be short-term stimulative. The problem is that he might just do something stupid to crash the economy in a crisis, but even so, you don't put on a sweater when it is kind of warm because you think it might get hot, and you'll want to take the sweater off then.

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    2. That's kinda like saying you don't go to a place that is hot and at high altitude to run a marathon.
      No, you don't, but if you live there for decades, your body's adjustment to that harsh environment will allow you to win all other marathons.

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    3. This isn't about training, it is about doing. There is no point in raising rates if the sole purpose is to lower them later.

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