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The essay actually addresses this right at the end, in the last paragraph before the conclusion: > One additional consideration that I think about is the possi

The essay actually addresses this right at the end, in the last paragraph before the conclusion: > One additional consideration that I think about is the possibility that low rates are scaring people and causing them to save more and invest less, while conventional wisdom is that low rates should lead to more investment and less saving. It is not a crazy argument because negative rates seem to be having unexpected results in some countries that have adopted them. If negative rates can scare people into saving more, perhaps very low rates can too? This would be an argument to raise rates just so people can feel more confident. However, it is hard for me to see how high rates by themselves can lead to more confidence, more spending and more investment. Take Japan: Should the Bank of Japan increase rates dramatically to send a confident signal? Does anyone think that would work in jump-starting Japan’s economy? I doubt it. A signal of confidence from higher rates must be coupled with strong underlying economic fundamentals. When the data indicate that we are approaching our dual mandate targets, I do believe markets will take some confidence from our rate increases because those higher rates will reflect strong economic fundamentals. I don’t find a strategy of raising rates purely as a psychological tool a compelling argument.

YZF 10y ago
Right. It's a chicken and egg though. The Fed isn't just raising rates. They're also saying we have full employment, inflation is up, so we can begin to normalize. Rates are still low and the increases are measured. Keeping them low would signal the Fed thinks something is wrong. EDIT: So far the small increases haven't had any adverse effects. If anything the opposite. So that's one counter-argument. The other thing to consider is that it's not the absolute rate or the derivative of the rate. It's the actions of the Fed vs. the market expectations. The expectation has been set for a long while that the Fed would try to normalize. If anything the Fed has not quite met the expectation. My last point is that the rates businesses borrow at are somewhat disconnected from the Fed rates, at times of higher perceived risk the premium vs. the Fed rate is higher. So the Fed raising rates doesn't necessarily increase costs to businesses.

YZF 10y ago

Right. It's a chicken and egg though. The Fed isn't just raising rates. They're also saying we have full employment, inflation is up, so we can begin to normalize. Rates are still low and the increases are measured. Keeping them low would signal the Fed thinks something is wrong. EDIT: So far the small increases haven't had any adverse effects. If anything the opposite. So that's one counter-argument. The other thing to consider is that it's not the absolute rate or the derivative of the rate. It's the actions of the Fed vs. the market expectations. The expectation has been set for a long while that the Fed would try to normalize. If anything the Fed has not quite met the expectation. My last point is that the rates businesses borrow at are somewhat disconnected from the Fed rates, at times of higher perceived risk the premium vs. the Fed rate is higher. So the Fed raising rates doesn't necessarily increase costs to businesses.