Brad Delong raises an interesting point on short term interest rates set by the Federal Reserve:
I see nothing in the data to suggest that 2% will be reached if the Federal Reserve does not reverse its tightening cycle as ill-judged.
That is all.
Jared Bernstein: Inflation?! We ain’t got no stinkin’ inflation!: “The core PCE deflator rose at an annual rate of only 1.2 percent in 2016Q4…
The betting market is slightly favoring an interest rate hike soon. The Republican Party economists or at least their donor class have been arguing for significantly higher interest rates and harder money. The data so far does not support a need for higher interest rates as there still is no inflation to worry about.
So what should Democrats and liberals do or not do? All else being equal, higher short term rates means a slower economy as investment gets to be slightly more expensive, housing gets slightly more expensive and debt carrying costs increases which means discretionary spending decreases for a given income and debt level. The impact of higher interest rates has a long lag of at least a year or more.
Midterm elections are effectively a vote on the incumbent party. A better economy, all else being equal, means a better vote margin for the incumbent President’s party. It is in the best interest of the Democratic Party to have a shitty economy in 2018. So should Democratic wonks rally against premature interest rate hikes or say it is a dumb idea and then let it be?
Cain
We should ask Paul McCartney.
I’d say be on record and tell em it is a dumb idea. By 2018, everything will be expensive – healthcare, loans, food/meat.. We went 8 years without any of those things going up.
Enhanced Voting Techniques
Again, leadership by stupid and arrogent old white men. Inflation was the problem back when they started in the 70s, so inflation is the problem when their early deminita, should be retired south end is warming a seat in the 2010s.
jl
” So should Democratic wonks rally against premature interest rate hikes or say it is a dumb idea and then let it be? ”
Given the amount of leverage possessed by the Democrats who are informed enough to object, I’m not sure what difference there is between rallying and just saying it is a dumb idea.
DeLong seems to be channeling Dean Baker on monetary policy lately. And the two have agreed on need for more fiscal stimulus for a long time.
jl
@Enhanced Voting Techniques: You forgot ‘bitter’ and ‘vengeful’.
swiftfox
Say nothing and stay neutral, my friend.
msdc
@Cain: I’d say Democrats should keep their mouths shut and let the Republicans douse themselves in kerosene, but there is something to be said for going on the record as saying that’s a bad idea. It’s not like the GOP is going to listen anyway.
Roger Moore
I think they should rally against. Then, by Cleek’s Law, the conservatives will be duty bound to urge the biggest rate hike possible. We keep our consciences clean and win at the ballot box when rate increases tank the economy.
mikefromArlington
Say nada. Republicans own everything now. This has been a hell of a run on the economy. It’s due for a correction at some point. If it goes sour, and Democrats are vocal, they could take some of the ownership imho. Say nothing and Fox and other propagandists have nothing to take out of context.
Mike in DC
I’m torn on whether the inevitable recession helps dems more politically if it happens in mid-2018 or mid-2020. In the first, it helps win more seats in the mid terms. In the second, it helps keep Trump to one term.
Major Major Major Major
@Enhanced Voting Techniques: we’ll be refighting the 60s and 70s for decades. The boomers’ obsessions have been inherited by their kids. Even the lefties won’t stop cosplaying as Weathermen.
goblue72
In the most general terms, its the banks that want higher interest rates, both long term and short term rates. The historically low rates on long term debt are perceived to be limiting bank profitability, in part as their higher yielding long term assets (i.e. long term loans) mature and turn over into lower yielding assets (i.e. long term loans lent at lower rates), while the cost to service their liabilities (i.e. deposits) remains the same.
On the flip, for short term assets (short term paper and the like), to the degree banks are able to keep a lid on on how much they have to pay depositors (since banks are right now at historically low leverage rates, and thus don’t need more deposits in order to make more loans), increasing short term rates would also boost profitability (since they can lend short term money at higher rates while paying same rates on deposits)
There’s some countervailing arguments as to why higher rates won’t super-charge bank profits under the theory that some banks ARE highly leveraged and thus would compete for deposits forcing industry right increase in rates paid on deposits, but the general idea remains the same.
Barbara
@goblue72: I often read comments to articles regarding the historically low interest rates, and the most outraged comments are from affluent retirees who are furious that they cannot rely on interest income from bonds in their retirement. That’s who benefits from higher interest rates without facing much in the way of downward risk (they can’t lose a job because they are already retired).
I almost always agree with Brad DeLong on just about anything. I say keep them as low as they can be. The risk of damage from the myriad other stupid things Trump is going to do is pretty high. For starters, pulling the rug out from under 20 million people is going to seriously erode their retail purchasing power, as well as sending health care providers into a tail spin to a greater or lesser degree.
Shalimar
I would say there is very little chance that anyone in power over the next 2 years will listen to anything Democratic wonks have to say, so rally away. It is probably only necessary to be on record saying it is a dumb idea, though, for the inevitable “I told you so” in late 2018.
msdc
@Roger Moore: I bow to your superior game.
Scotius
While we’re begging them in the name of all that is holy not to raise interest rates, we should also remind them not to drink liquid Drano or eat toxic waste. It’s a shame to waste an opportunity to have them do the opposite of what we advise.
patroclus
What the FOMC is considering is a 25 basis point increase in the fed funds target and that small of an increase really isn’t going to effect much of anything, and the usual monetary policy lag time is 6-9 months. So, this really isn’t that much of a debate right now – if they peg higher rates, it means that they are anticipating a slightly higher likelihood of inflation in about 1-1.5 Friedman units. If they don’t, then it means they really don’t see inflation as a foreseeable likelihood. Banks usually fund loans on the basis of LIBOR, (the London Interbank Offered Rate – which is market determined) which is affected by the fed funds rate but not necessarily directly determined by it. Moreover, in the 21st century, banks almost always match-fund and securitize (or otherwise dispose of the loan asset). That is, they purchase the money which they lend and then they sell most of that (Dodd-Frank only requires 5% skin in the game) to investors in the securities markets. That’s a fancy way of saying that commercial banks don’t really care what the prevailing short-term rates are – what they are really concerned about is the “net interest margin,” that is, the difference between what they have to pay for money and what they can lend it out at. And their investment banking affiliates are also concerned about the prices in the securities markets, which are going great guns right now.
High interest rates choke off loans and growth, so we don’t really want that unless there is a good reason for it (and with low inflation, there isn’t). But we don’t really want rates at near zero either because that limits the tools that monetary policy-makers have in the event of a near-term recession. So it makes policy sense for rates to gradually move up a little in growth periods (like under Obama/Yellon) so that they can move down in slow periods. A 25 basis point increase in the targets some time this Spring is more or less in line with normal regulatory behavior at this time in the business cycle.
That’s the policy view – the political view is affected by WAY more factors. Yellon and most of the FOMC are Obama appointees who probably won’t be re-appointed. They’ll be blamed if the economy heads South within a Friedman unit of the end of their tenure. And they’ll be blamed whatever they do now – raise rates or hold off. So my view is that they should just implement the best policy for growth, stabilization, safety and soundness, an efficient allocation of resources and an equitable distribution of income and wealth regardless of the political implications. Politicians, in my view, do not understand finance or monetary policy and should really stay out of it. But they usually don’t. If I were advising a Democratic politician, I would suggest releasing some statement warning against the inimical effect of higher rates for the “I told you so” effect later and lamenting the potential effect of higher rates on their constituents but otherwise saying little else so as to reveal that they don’t know what they’re talking about.
Rates are likely to head up (a little) this Spring and Summer. If not in March, then a month or two later. Where they go after that depends on how the economy performs.
goblue72
@Barbara: Oh certainly. Hell hath no fury like a well-off retiree in Florida bitching that Obama is the reason they can’t fund their AM tee times off their T-bills anymore.
Sherparick
@Enhanced Voting Techniques: Hey, I resemble that remark! The more the honest Democratic wonks wank about raising interest rates, the more the Republicans will want to do it. It is the Iron Law of pissing off liberals & shifting money to the rentier class.
bago
Working in the financial industry, I can tell you that higher interest rates are like Christmas bonuses. My team doubled in size after the last hike.
Doug R
I blame extended low interest rates for the insanely high housing prices here in the Pacific Northwest. They are also largely to blame for pension plans being underfunded. A couple of points and our pension would be fully funded or so I hear.
The housing market around here is sorely in need of a shakeout, too bad now it will be a massive shock.
jl
@Barbara: Such low rates for so long do cause economic problems. But, in the absence of a good fiscal policy, keeping interest rates low is the best we can do.
@patroclus: I think there is lore among bankers that low rates ‘compress’ the margin that they can make. Whether that is true or not I don’t know.
catclub
@Doug R:
I am sure PNW being really popular with companies like Microsoft and Amazon has nothing to do with it. Nor Chinese investors buying homes with cash like in British Columbia.
Whatever floats your boat.
Kenneth Almquist
The most important issues for Democrats to fight on are ones that will harm Americans over the long term, even after Trump is out of office. A premature rate hike will cause short term pain, but the long term effects will probably be small.