walkitout (walkitout) wrote,
walkitout
walkitout

Kool Aid! Fed Rate revisited

I have no idea why people have become so convinced that the Fed is going to raise rates, probably this summer. Just a couple months ago, I thought we were all pretty on board with the no, not until the fall. AND THEN the Swiss Franc dropped its peg and the ECB declared QE and we're now engaging in an international round of Let's Lower Interest Rates to make our currency weaker so our export sector can make more money and we can stimulate our economy. IF YOU HAVE NOT FIGURED IT OUT YET that means disinflation at best and deflation at worst.

That is, NOT time to raise rates. Okay, fine. Let's look at CPI:

http://data.bls.gov/timeseries/CUUR0000SA0L1E?output_view=pct_12mths

Does that look like a scary chart, inflation about to go out of control NO IT FUCKING DOES NOT. Quite the contrary.

So let's think this through. Do we need to raise rates because our economy is dangerously overheated? CPI ex food and fuel is under the target rate and dropping. Commodities are crashing. Unemployment is running above 5% (which is, under current thinking, full employment). There is no indication of wage pressure and, in fact, there are a lot of people worrying about the LACK of wage pressure and the implications of that for companies being able to sell crap to people.

http://data.bls.gov/timeseries/LNS14000000

Why would we want to raise rates in this environment? Oh, right: we might raise rates in this environment if our currency was dangerously weak -- raising rates will attract investment strengthening the currency (sometimes I get this backwards -- speak up if I have!). Lowering rates will discourage investment, weakening the currency (but maybe strengthening the economy through stimulus, or by making the export sector more attractive).

Do we want to have a strong currency in the United States? Officially, the policy is a bit weaselly. Unofficially, the answer is unambiguously NO FUCKING WAY do we want a strong currency. We spend a good chunk of time jawing about how other people are artificially holding their currency down so they can sell us crap (YES I MEAN CHINA).

Explain to me again why the Fed would raise rates this summer. As near as I can tell, the assumption is that Janet Yellen is a fool leading a pack of fools. Which reflects more accurately on anyone who believes that.

Here's my evidence that people are being silly:

http://www.bloomberg.com/news/2015-01-26/fed-to-raise-rates-midyear-even-with-low-inflation-survey-shows.html

I sort of suspect that part of what's driving this believe is that over half the respondents are discounting the exchange rate/currency strength issue entirely.

ETA: Here is Bill McBride on the subject -- he's so much more restrained than I am.

http://www.calculatedriskblog.com/2015/01/duy-while-we-wait-for-yet-another-fomc.html

I've been thinking about the psychology of this a little bit, because it is at least as confusing to me as the OH NOES INFLATION of 2011 and thereabouts. And I think I have an idea about what is going on here.

ETAYA: I'm still puzzling over not wanting to overshoot the 2% target. I'm fairly certain if you are going to "tune" into a given number, you have to alternate between under and over shooting until you land on it. If you don't alternate, you'll never hit it -- your defacto target is in fact something else at the midpoint of your swings.
Tags: economics
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