Fed scratches their seven-year itch: they raise a quarter point, as expected

December 16th, 2015 at 5:35 pm

I don’t have much else to say about this, so here are some worthy links:

Dean Baker’s statement

Josh Bivens’ statement

My statement: Unsurprisingly, I’m with the two guys above. It’s now all about the path forward for the Fed funds rate. I share Dean’s hope that they go back to being data driven, and given lack of inflationary pressure and ongoing job market slack–remember, the underemployment rate is 9.9% (1.4 ppts above its “natural rate“)–the path should be gradual, a word Chair Yellen (and the FOMC statement) repeatedly emphasized. Shallower, I’d argue, than the point per year in the Fed’s economic projections, but that forecast is a function of their expectation that inflation hits their target by 2017. As Andy Levin’s figure below shows, they’ve had considerable trouble with this call.

andyL_infl

Source: Andy Levin

Two other points. First, I keep hearing this rationale for today’s hike that if the Fed gets behind the curve, inflation could suddenly spike way up and then the Fed would have to slam as opposed to tap the brakes. Neil Irwin tells that story here (he doesn’t endorse it–he just recounts it):

If the Fed had waited another several months, to the point where the economy was at real risk of overheating, with inflation rising significantly, it may have needed to increase rates sharply to try to head it off. And when moving quickly, there would surely be bigger disruptions to financial markets and greater risk of miscalibration and raising rates too much, choking off the economy altogether.

Anything’s possible, but that seems wrong on the data (flat Phillips Curve), on inflation’s history in recent years, on the extent to which inflationary expectations remain well-anchored, and most disconcertingly, on the problem of existing risk asymmetries: the risk that too steep a rate-hike path would lead to a weaker downturn is significantly greater than the risk of spiraling inflation.

In that regard, it’s worth thinking a bit about the distributional consequences of the Fed’s action, as I do here vis-a-vis the black workforce. The people who benefit most from full employment are the least advantaged, and they thus have a lot riding on what the Fed does next.

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5 comments in reply to "Fed scratches their seven-year itch: they raise a quarter point, as expected"

  1. Phil Perspective says:

    The people who benefit most from full employment are the least advantaged, and they thus have a lot riding on what the Fed does next.

    And those are the people who have no voice in the process. The Fed doesn’t give a crap about them.


  2. Tom in MN says:

    I’m an engineer not an economist, but if I had a model that was predicting what is shown in the figure, I would be thinking my model was wrong.


  3. Brahmjit Singh says:

    This was a misjudgment from Fed to raise at this point.


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