This just in: Fed doesn’t need to raise! Appreciating $ is doing it for them.

September 16th, 2015 at 3:39 pm

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!



Source: Goldman Sachs

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3 comments in reply to "This just in: Fed doesn’t need to raise! Appreciating $ is doing it for them."

  1. Bud Meyers says:

    Comment by economist Mark Thoma, regarding your article at the Washington Post:

    Bernstein is perfectly right, but he neglects mentioning a third option, that was advocated at the time, for example by Joe Stiglitz: temporary bank nationalization, which would have avoided the “Heads I win Tail you lose” feature of financial sector bailouts.

    The second point Bernstein makes is that, regardless of the strategy chosen to save the financial sector, fiscal policy should have been much more aggressive in fighting the downturn.

    Well, he says it all. What drives me nuts, is that the he complains about the US, where the Fed showed incredible activism, where the Obama administration voted and implemented a huge stimulus package (the American Recovery and Reinvestment Act) just weeks after been sworn in office — while it took us 7 years to decide to adopt a cumbersome investment plan that will make little or no difference.

    Without even mentioning the fact that the whole Greek crisis, since 2010, has been managed with an eye to (mostly German and French) lenders’ needs, rather than to the well-being of European (and in particular Greek) taxpayers.

    I really would like to know what would Bernstein say, were he to comment the EMU lessons from the crisis.

  2. Ben Groves says:

    Looks like the dollar normalized, hardly impressive. Nor does it tighten much, if anything, it expands credit acceleration. Try harder.

  3. spencer says:

    Try looking at the broad trade weighted dollar if you think this is just normalization.

    It is near all time highs.