Of note, shock therapy by hiking interest rates was credited with curing stagflation in the USA in the 1980s, but Canada did the same and was not nearly so lucky. It's almost like central banks are not nearly as omnipotent, omniscient, or omnibenevolent as they think they are.
Volkers shock therapy is the widely accepted reason inflation came down in the early 80s.
However, Volker's most extreme rate increases came AFTER inflation began trending down, suggesting that the role of extreme interest rates was grossly exaggerated in the official narrative. Canada's experience, Japan's spiral into deflation in the 90's, and Powell's failures on inflation now all confirm that contrarian view of Volker's strategy.
Indeed, the conventional wisdom is that interest rates are "pushing on a string" only on the way DOWN (which is quite self-evident, nonetheless), but apparently that is true in BOTH directions as well. Raising rates to higher than the inflation rate may help somewhat to squeeze "inflationary psychology" out of the system, but it does NOT solve the fundamental cause of inflation, which is shortages of goods and services (oil in the case on the 1970s and early 1980s, and supply chains in general in recent years). Central bank induced recessions certainly kill demand, but the cure is often worse than the disease.
Certainly keeping rates too high for too long will backfire hard.
The only advantage to using interesting rates as a policy lever at all is that it is quick and easy, as well as precise and incremental. But it is typically not very effective, and often counterproductive in practice. The only way to cure inflation for good, without wrecking the economy in the process, is to cure the shortages that ultimately caused it in the first place, something that central banks are not equipped to do.
This shows the limits of what central banks can actually do with respect to the economy. Their God-like power apparently isn't so God-like after all, as evident in the relatively diffident response of the markets to the central banks' actions.
I love your analogy of ‘you can’t push a string’. And I get the sense that the central banks are just muddling their way through things - impotent indeed.
But what’s up with Turkey, jumping their rate to 15%? Is that normal for them, or a reflection on their recent election results, or is their economy becoming increasingly nervous about their geopolitical location?
Erdogan has for a couple of years now had the odd idea that cutting interest rates is how you bring down inflation. Suffice it to say, it hasn't worked.
Erdogan is, to put it mildly, rather eccentric as far as world leaders go. Interest rates are a razor-sharp double edged sword, so there is a kernel of truth to the idea that cutting rates may bring down inflation, depending on whether it is demand-pull or cost-push inflation, of course. For the former, it is best to raise interest rates, while for the latter it is best to cut interest rates. Either way, we are seeing the limits of what central banks can actually accomplish.
Of note, shock therapy by hiking interest rates was credited with curing stagflation in the USA in the 1980s, but Canada did the same and was not nearly so lucky. It's almost like central banks are not nearly as omnipotent, omniscient, or omnibenevolent as they think they are.
Volkers shock therapy is the widely accepted reason inflation came down in the early 80s.
However, Volker's most extreme rate increases came AFTER inflation began trending down, suggesting that the role of extreme interest rates was grossly exaggerated in the official narrative. Canada's experience, Japan's spiral into deflation in the 90's, and Powell's failures on inflation now all confirm that contrarian view of Volker's strategy.
Indeed, the conventional wisdom is that interest rates are "pushing on a string" only on the way DOWN (which is quite self-evident, nonetheless), but apparently that is true in BOTH directions as well. Raising rates to higher than the inflation rate may help somewhat to squeeze "inflationary psychology" out of the system, but it does NOT solve the fundamental cause of inflation, which is shortages of goods and services (oil in the case on the 1970s and early 1980s, and supply chains in general in recent years). Central bank induced recessions certainly kill demand, but the cure is often worse than the disease.
Certainly keeping rates too high for too long will backfire hard.
The only advantage to using interesting rates as a policy lever at all is that it is quick and easy, as well as precise and incremental. But it is typically not very effective, and often counterproductive in practice. The only way to cure inflation for good, without wrecking the economy in the process, is to cure the shortages that ultimately caused it in the first place, something that central banks are not equipped to do.
This shows the limits of what central banks can actually do with respect to the economy. Their God-like power apparently isn't so God-like after all, as evident in the relatively diffident response of the markets to the central banks' actions.
The limits of what central banks can do: not much of anything good.
Indeed
I love your analogy of ‘you can’t push a string’. And I get the sense that the central banks are just muddling their way through things - impotent indeed.
But what’s up with Turkey, jumping their rate to 15%? Is that normal for them, or a reflection on their recent election results, or is their economy becoming increasingly nervous about their geopolitical location?
Erdogan has for a couple of years now had the odd idea that cutting interest rates is how you bring down inflation. Suffice it to say, it hasn't worked.
So now he's trying a little shock therapy.
Erdogan is, to put it mildly, rather eccentric as far as world leaders go. Interest rates are a razor-sharp double edged sword, so there is a kernel of truth to the idea that cutting rates may bring down inflation, depending on whether it is demand-pull or cost-push inflation, of course. For the former, it is best to raise interest rates, while for the latter it is best to cut interest rates. Either way, we are seeing the limits of what central banks can actually accomplish.