How Long the Lag?
Waller’s View
How Quickly Will Rate Increases Slow Economy?
The Wall Street Journal reports Fed’s Interest-Rate Strategy in 2023 Hinges on How Quickly Rate Increases Slow Economy
Federal Reserve officials’ deliberations this week over how much more to raise interest rates will hinge on how much they expect the economy to slow this year.
Key to those discussions at their two-day policy meeting will be estimating how much their previous rate increases will cool growth and inflation over time, or what Nobel Laureate Milton Friedman called the “long and variable” lags of monetary policy.
“There will be a lot of thinking about ‘Are the effects we’re getting about on the track that we expected? Are they coming sooner, or are they coming bigger?’” said William English, a former senior Fed economist who is a professor at the Yale School of Management.
Competing Views
- “We’re in a different world from the last several business cycles,” said Donald Kohn, a former Fed vice chairman. “The last several cycles haven’t had pandemics and land wars in Europe in them.”
- “I think we’re seeing a lot of the impact for monetary policy coming through in the next quarter,” Mr. Waller said.
- Economists at Goldman Sachs see shorter lags. They say markets’ pessimism is overdone, and they are among those who think the economy will prove more resilient than anticipated, which could call for a longer period of higher rates.
I not sure what Donald Kohn’s view says or means.
Waller’s view makes the most sense to me.
Regarding point 3, the Goldman Sachs view, where precisely is the pessimism? It’s certainly not in the stock market.
And shorter lags mean a longer period of higher rates? OK. then what precisely is the stock market counting on.
The Right Question
Are we really asking the right question?
It’s not really a matter of how quickly rate increases will slow the economy, but rather how quickly rate increases will slow inflation.
I don’t know the answer, nor does anyone else.
But the higher rate hikes go and the longer they stay there, the worse the prospects are for the stock market.
Earlier today I commented “On top of it all, how the Fed can untangle this inflationary mess is a mystery. The negative impacts of QE cannot be easily undone.”
The same applies to a myriad of free money handouts, eviction moratoriums, food stamp increases, etc. If that line of thinking is accurate, stocks are extremely overvalued.
For discussion, please see Why Do We Have Reduced Participation in a Labor Shortage Environment?
This post originated on MishTalk.Com.
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Mish
Williams said this month that the roughly $2 trillion parked daily by money
market funds and others in the Fed’s overnight reverse repo facility is the
“key” to the outlook. As markets adjust to rising interest rates,
cash will start to flow from this facility into the private sector and
effectively replenish reserves levels, giving the Fed the additional runway
needed to keep cutting its holdings, he said.”
Kohn? He’s vacuous: “I know of no model that shows a transmission from bank
reserves to inflation”
11/16/06: “Spencer, this is an interesting idea. Since no one in the Fed tracks
reserves…” Dr. Richard Anderson, former V.P., and senior economist, FRB-STL.
varies widely over time, & in magnitude.
stagflation is the 1966 Interest Rate Adjustment Act. “while the aggregate of
time and demand deposits continued to increase after July, the proportion of
time to demand deposits diminished. Whereas time deposits were 105 percent of
demand deposits in July, by the end of the year, the proportion had fallen to
98 percent. These were all desirable developments.”
M1 peaked @137.2 on 1/1/1966
and didn’t exceed that # until 9/1/1967. Deposit rates of banks decreased from
a high range of 5 1/2 to a low range of 4 % (albeit not enough). A .75%
interest rate differential was given to the nonbanks.
And during this period, the
unemployment rate and inflation rates fell. And real interest rates rose.”