Just when we see some early signs of President Trump’s manufacturing re-shoring agenda coming to life coupled with the AI data center investments, the raising of interest rates can do nothing but harm. High demand is offset by higher supply to provide price equilibrium. With the increased manufacturing activity and data center construction activity and increase in gas and oil production this process has just started. Reducing demand through interest rate hikes is counter to growth.
Volcker's logic in 1979 was sound as far as it went: when supply is suddenly reduced demand must be reduced as well to restore equilibrium. That much is simple math: market equilibrium occurs when supply equals demand.
The policy question is how best to restore equilibrium after a supply shock. Volcker's reasoning in 1979 was that allowing the market to sort it out organically would simply take too long. Anyone who lived through the stagflation of the 1970s can appreciate why Volcker reached that conclusion.
However, in 2022 there was no supply shock, but a demand rebound, and the practical magnitude of the present oil supply shock is thus far still well below where it was in 1979.
Without a large supply shock to justify the stiff medicine, the interest rate hikes are the wrong medicine.
Warsh and the FOMC would see this clearly if they looked at the data without the bias of all their fancy modeling. That, of course, lacks the sophistication elites like Warsh demand.
Do you have a good link to where Powell admitted he was trying to create unemployment to fight inflation? I read quite a few articles at the time covering it but I regret not saving any.
Powell never said "unemployment is good" outright. Like all good aparatchiks, he was a master of talking around something.
But when you consider the ramifications of what he said at Jackson Hole in 2022, fewer jobs created was very much his intentional policy.
Specifically, he said this:
"Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain."
I did a more detailed deconstruction of his keynote address at the time.
Oh I remember. It was one of my favorite (or least favorite) examples of Fedspeak I have ever heard but even I had forgotten just how annoying it was. Look at that. One big paragraph to obfuscate when he could explain everything in two sentences. That one’s going in the archive.
What I find particularly offensive is the casualness of Fed thinking that constraining employment and consumption are small consequences to workers and consumers.
If workers and consumers have to shoulder the costs of corralling consumer price inflation, simple respect demands honest acknowledgement and appreciation of them taking on that burden.
Not once has anyone at the Fed ever shown ordinary people that much courtesy and respect.
And this is why the Fed employees should not have palatial offices with marble bathrooms. In order for them to do their jobs effectively they NEED to be in touch with ordinary workers!
I’ve got to say it yet AGAIN, Magnificent Man: BRILLIANT!
Just when we see some early signs of President Trump’s manufacturing re-shoring agenda coming to life coupled with the AI data center investments, the raising of interest rates can do nothing but harm. High demand is offset by higher supply to provide price equilibrium. With the increased manufacturing activity and data center construction activity and increase in gas and oil production this process has just started. Reducing demand through interest rate hikes is counter to growth.
Volcker's logic in 1979 was sound as far as it went: when supply is suddenly reduced demand must be reduced as well to restore equilibrium. That much is simple math: market equilibrium occurs when supply equals demand.
The policy question is how best to restore equilibrium after a supply shock. Volcker's reasoning in 1979 was that allowing the market to sort it out organically would simply take too long. Anyone who lived through the stagflation of the 1970s can appreciate why Volcker reached that conclusion.
However, in 2022 there was no supply shock, but a demand rebound, and the practical magnitude of the present oil supply shock is thus far still well below where it was in 1979.
Without a large supply shock to justify the stiff medicine, the interest rate hikes are the wrong medicine.
Warsh and the FOMC would see this clearly if they looked at the data without the bias of all their fancy modeling. That, of course, lacks the sophistication elites like Warsh demand.
Do you have a good link to where Powell admitted he was trying to create unemployment to fight inflation? I read quite a few articles at the time covering it but I regret not saving any.
Powell never said "unemployment is good" outright. Like all good aparatchiks, he was a master of talking around something.
But when you consider the ramifications of what he said at Jackson Hole in 2022, fewer jobs created was very much his intentional policy.
Specifically, he said this:
"Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain."
I did a more detailed deconstruction of his keynote address at the time.
https://newsletter.allfactsmatter.us/p/powell-was-blunt-at-jackson-hole
Oh I remember. It was one of my favorite (or least favorite) examples of Fedspeak I have ever heard but even I had forgotten just how annoying it was. Look at that. One big paragraph to obfuscate when he could explain everything in two sentences. That one’s going in the archive.
You really are a Magnificent Man, she swooned.
What I find particularly offensive is the casualness of Fed thinking that constraining employment and consumption are small consequences to workers and consumers.
If workers and consumers have to shoulder the costs of corralling consumer price inflation, simple respect demands honest acknowledgement and appreciation of them taking on that burden.
Not once has anyone at the Fed ever shown ordinary people that much courtesy and respect.
And this is why the Fed employees should not have palatial offices with marble bathrooms. In order for them to do their jobs effectively they NEED to be in touch with ordinary workers!
Central bank bureaucrats should have spent at least some time doing manual labor.
I'm a journalist, analyst, voice and data network engineer, and accountant.
But I've also done landscaping, construction, and private security. I know what it means to be physically tired at the end of the work day.
That affects how the policy analysis goes. And Kevin Warsh is the latest proof of this.