A, I’m rushing and don’t have a lot time for this and B, the Fed’s interest-rate-setting-committee is meeting as we speak, and while some of them are surely waiting to hear my views on this, others have probably already made up their minds.
But I’d quickly like to pile on a point that a few others have made and add my wrinkle: if you think the US economy needs a tap on the breaks to avoid overheating, it’s already gotten many a tap, many times over, from two related sources: tightening credit markets and the appreciating dollar.
A number of commentators have made the credit market point (part of which is itself due to $ appreciation). Larry Summers wrote:
…markets have already done the work of tightening. The U.S. stock market is worth $700 billion less than it was 2 weeks ago and credit spreads have widened noticeably. Financial conditions as measured by Goldman Sachs or the Chicago Fed index have tightened in the last 2 weeks by the impact equivalent of more than a 25 BP tightening. So even if resisting inflation required a 25 BP tightening as of two weeks ago, this is no longer the case.
The good folks at GS actually estimate that the tightening in their financial markets index is equivalent to three 25 bp Fed funds rate hikes, or 75 bp’s, though there’s a wide confidence interval.
But I’d argue that dollar is a bigger deal here because of its negative impact on growth and inflation, as well as the fact that it’s gone up more than the financial indexes. It’s already up 15% and as this GS forecast shows, it’s likely heading up further. If you map this on to 25 bp Fed rate hikes, you’d get a lot more than three.
Given that it’s not only that the wage and price data don’t support a hike but beyond that, other economic variables are providing hike-like constraints, I can only conclude that the hike-advocating hawks are working from a pretty different model, i.e., the EAZR model: Enough Already with the Zero Rates!