The Fed is set on tightening

The Phillips Curve crowd, led by Yellen, thinks falling unemployment will bring more inflation. But have some qualms:

Fed Minutes: Officials in December Expressed ‘Significant Concern’ About Low Inflation

Minutes also show worries about global growth and strong dollar

“Because of their significant concern about still-low readings on actual inflation and the uncertainty and risks present in the inflation outlook, (officials) agreed to indicate that the (Fed) would carefully monitor actual and expected progress toward its inflation goal,” the Fed said in minutes of its Dec. 15-16 policy meeting released Wednesday.

But they hiked rates anyway!

Then there is the “financial crisis” group led by Fischer

For Vice Chairman Staley Fischer markets are wrong. There will be more tightening:

Fed’s Fischer Says Four Interest-Rate Increases Possible This Year

Fed vice chairman in CNBC interview says market expectations of two interest-rate increases are ‘too low’

Fischer worries Fed can’t head off, contain financial crises

Fischer’s comments suggest that the central bank may need to rely more on monetary policy to restrain financial excesses than it has in the past. In fact, he told the conference that it might be necessary for the Fed to increase interest rates if financial markets were overheating, though the first line of defense should be the use of regulatory measures to head off bubbles.

A rate hike was the “mutually satisfactory” outcome.

3 thoughts on “The Fed is set on tightening

    • You said: “Banks don’t lend much at zero.”

      This is the wrong way to look at it.

      Banks lend when they think they’ll be paid back and when they can charge a nice real interest rate. They lend insofar as their is loan demand, insofar as the economy is strong.

      Banks might raise their funds at nominal interest rates close to zero, when policy rates are low, but I can assure you, they don’t turn around and lend those funds at zero. Interest rates are a side show, they don’t have stable correlations with the real economy. Look at nominal spending levels.

  1. Marcus, we are seeing the markets work through the logic of the Fed’s rate increase, and all the silly things Fed lieutenants are saying. WTI oil futures are at $33 a barrel, S&P500 is at the lowest level since October, 5-year TIPS breakeven is 1.3%. This policy regime we are in is set to produce weak nominal growth, 2 or 3% a year maybe.

    My guess is the Fed will back off on rate hikes if the markets really sour and the economic data come in consistently weak, but anytime things look good, they’ll spoil the party with a rate hike. Same as the Market Monetarist have been predicting since 2010 or earlier. I suppose the upside is that, in the long run, the economy will adjust to 2% nominal growth, which might give us the 0% inflation they want. I wonder if in 2025 the Fed will be insisting that 1% yearly deflation is the optimal target?

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