I hope you will forgive me for talking about monetary policy. But really, you should pay attention, because it is good for you, in a far more important way than Cymbeline. Tim Duy has a sub-blog over at Mark Thoma’s place, Fed Watch. In general, I skip what he writes, because it makes my brain hurt. Monetary policy really is difficult. It drives home just what a slippery concept money is.
But there is another aspect of it, that is really important but also keeps me away from it: the Federal Reserve is irrational. It has been obsessing for the last two years about when exactly it will raise interest rates. I saw an interview recently where Dean Baker explained in clear terms what that means: the Fed raising interest rates is deciding to put millions of people out of work to head off inflation. Now, maybe that’s a good thing when inflation is a problem. But when there is just concern that maybe the economy is kind of, sort of at the place where maybe inflation will tick up to the Fed’s own 2% target, talking about raising interest rates is not just mad — it is evil.
I’ve been in this very uncomfortable position of thinking that the Fed is making no sense. But everywhere you look, people are saying that they are right to do this. I realize that most of this is nonsense. It’s an unstated kind of moralism that cheap money just can’t be good. But this belief is so common that it makes me uncomfortable. If I didn’t have Dean Baker, who I trust completely, I’d wonder if I weren’t just really ignorant. So any indication that the conventional wisdom is actually wrong is welcome.
Thus we get to Duy’s recent article, Brainard Drops A Policy Bomb. That’s a reference to Lael Brainard, a Fed governor, but formally Undersecretary of Treasury. She’s something we don’t see all that much in economists: an independent thinker. She recently gave a speech at the National Association of Business Economists. And she said that she was not willing to make “calendar-based statements” about raising interest rates. This is a shot across the bow at Janet Yellen and others at the Fed who seem to do nothing but.
The issue, to me at least, is that most of the people are not letting the facts guide them. They want to raise interests rates. (That is: they want to put people out of jobs and make wages continue to stagnate.) And they are looking for any reason to do so. And now, it’s December. If the economy can just hold on and look good for a couple of months, then Yellen and company can raise the interest rates and get the bankers off their backs!
Paul Krugman offered an interesting take on why it is that Brainard has such a different idea from the other folks at the Fed, “I would say that Brainard’s experience is dominated not so much by the Great Moderation as by the Asian financial crisis and Japan’s stagnation.” In other words, Brainard isn’t hyper-focused on the possibility of inflation — she knows that there is at least as big a threat of low and even negative inflation.
What I find fascinating is that the inflation rate in the 1970s was high — but not that high. In 1980, it reached almost 15%. But before the Federal Reserved decided to tame inflation, the unemployment rate was less than 6% — so workers weren’t suffering that much. I can see being totally freaked out if the inflation rate had been 200%. But it was manageable. And that was it at its worst. And they are only concerned about that, and not the great threat of low inflation.