Overall, this is a pretty good picture for Republicans going into the midterm elections. No opponent can point to anything catastrophic, such as gas prices doubling or stagflation settling in.
But I am surprised to hear talk of needing to raise the federal funds rate. Trump wants it lowered. Peter, do you think Warsh would actually raise it, and before the midterms?
Accepted wisdom among central bankers around the world is that the way to combat inflation is to raise interest rates.
The goal is to "cure" inflation by suppressing demand until inflation eases sufficiently.
Its efficacy is problematic at best, and is most likely to be effective when dealing with supply shocks. In a supply shock there is a sudden drop in available supply, and the only way to restore equilibrium to the marketplace is for demand to shrink accordingly. When inflation is the result of accelerating demand (either organic or from excessively loose monetary policy), it takes on the aspect of an intentionally self-defeating mechanism, as it seeks to squelch the demand other fiscal and monetary policies have likely created.
However, if inflation is running hot, the reflexive central bank move is to hike interest rates.
Depending on what inflation does over the next two or three months, the Kevin Warsh-led FOMC could very easily raise the federal funds rate. If the second shoe drops on the oil supply shock from the illegal closure of the Strait of Hormuz, there might even be broad support for the measure.
At the moment, job growth and economic growth are sufficiently robust that even Donald Trump does not have much room for calling for a rate cut. If economic conditions remains more or less as they are now, the best Fed policy on interest rates may be to just stand there and do nothing.
Overall, this is a pretty good picture for Republicans going into the midterm elections. No opponent can point to anything catastrophic, such as gas prices doubling or stagflation settling in.
But I am surprised to hear talk of needing to raise the federal funds rate. Trump wants it lowered. Peter, do you think Warsh would actually raise it, and before the midterms?
Accepted wisdom among central bankers around the world is that the way to combat inflation is to raise interest rates.
The goal is to "cure" inflation by suppressing demand until inflation eases sufficiently.
Its efficacy is problematic at best, and is most likely to be effective when dealing with supply shocks. In a supply shock there is a sudden drop in available supply, and the only way to restore equilibrium to the marketplace is for demand to shrink accordingly. When inflation is the result of accelerating demand (either organic or from excessively loose monetary policy), it takes on the aspect of an intentionally self-defeating mechanism, as it seeks to squelch the demand other fiscal and monetary policies have likely created.
However, if inflation is running hot, the reflexive central bank move is to hike interest rates.
Depending on what inflation does over the next two or three months, the Kevin Warsh-led FOMC could very easily raise the federal funds rate. If the second shoe drops on the oil supply shock from the illegal closure of the Strait of Hormuz, there might even be broad support for the measure.
At the moment, job growth and economic growth are sufficiently robust that even Donald Trump does not have much room for calling for a rate cut. If economic conditions remains more or less as they are now, the best Fed policy on interest rates may be to just stand there and do nothing.