Comment by jiocrag
10 days ago
This is flat out wrong. The Fed raises and lowers interest rates to stimulate or tamp down demand. Raising interest rates because prices rise while demand drops due to a trade war would accomplish nothing.
10 days ago
This is flat out wrong. The Fed raises and lowers interest rates to stimulate or tamp down demand. Raising interest rates because prices rise while demand drops due to a trade war would accomplish nothing.
The Fed has two mandates: maximum employment & stable prices. If prices go up, the Fed is mandated to raise interest rate.
> The Fed has two mandates: maximum employment & stable prices.
It actually has three listed in the Federal Reserve Act:
* Maximum employment
* Stable prices
* Moderate long-term interest rates
It's popularly called a “dual mandate” because it is perceived that properly balancing the first two will naturally also achieve the third.
> If prices go up, the Fed is mandated to raise interest rate.
No, it isn't, especially if employment is already below the “full employment” level and expected to drop even without the rate hike. Demand-pull inflation in periods of strong employment and economic growth or looming deflation in periods of weak enoloyment and economic growth are easy-mode monetary policy choices (at least as to direction, magnitude may be tricky).
But tariff-induced cost-push inflation in weak growth slowing employment conditions, where Congress and the President decline to remove the non-monetary policy root cause, that’s hard-mode monetary policy, because the usual tools to address either the employment or price problem will make the other worse.
They're mandated to raise interest rates in the event of structural inflation, not in the event of a one-time increase in prices. It would be silly if the government increasing the VAT required the fed to increase interest rates.
Even if the tariffs work as desired, they result in persistently higher prices. Unless you're expecting American laborers to work for less than literal Chinese robots, I guess.
3 replies →
That's an odd, fundamentally disconnected mechanism that, I think, would have devastating impacts for Main St.
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The first sentence is right. The second is wrong, as implied by the first. If raising interest rates would exacerbate a recession and thereby unemployment, the fed will not do it just because prices are rising. You are ignoring half of their mandate.
The Fed has a mandate to keep inflation under control but a lot of leeway to decide if they should increase interest rates or not. If they see a price increase as temporary or structural, and not based on an interest-rate-responsive process, they will not increase rates. Some prices are "sticky", some are definitely not.
So you don't think employers will raise wages as the cost of food increases?
No - because generally there will be a lot more folks in the labor market with less leverage so they will not need to pay more in order to attract the talent they need. This is also why inflation is typically solved by recessions. They reduce labor demand which reduces wages which (generally) reduces the price of producing things overall.