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To explain more about the logic used by the guy you replied to... ...the problem is people think: interest rates go up, economy slows down, we can never raise

To explain more about the logic used by the guy you replied to... ...the problem is people think: interest rates go up, economy slows down, we can never raise interest rates. This logic takes on a life of its own. The US economy was in this position in the late 60s: the Fed was under pressure to accommodate govt financing, they raised rates in 1959 and were blamed for causing a recession that influenced the outcome of the 1960 election, in 1967 they attempted to raise rates briefly but did so at the wrong time...eventual result (combined with some unfortunate timing with oil price changes) is rates never rise, inflation does, serious problems. When the discussion moves to this point, and we have been moving this way for years, I think it is a sign that something has gone quite wrong. And that expectations around interest rates and Fed behaviour are actually adding volatility and uncertainty, not reducing it. You are quite correct though. Rising interest rates are not bad. It is just the price of money. Falling interest rates can be just as bad too, but the problems are usually subtle (i.e. financial repression, which is what is happening now, no-one will realise what has happened until they try to retire in 20/30 years and realise they can't). Public policy has moved to this risky stage where people blame everything on politicians...the result is, unfortunately, inevitable.

refurb 5y ago
This is the exact situation many financial commentators highlighted post-2008, so I think your historical points are very relevant. The Federal Reserve is supposed to have independence from the government. It will develop its own monetary policy which doesn't need government approval. In reality, the President appoints all the Governors, so people get selected based on doing what the President wants done. The Fed's monetary policy is typically an inflation target - keep the money supply growing to encourage growth, but keep inflation in check as well. The problem is the political influence starts to impact the pure decisions about what's best for the economy. Election coming up? Well, hold off on increasing rates since we need good employment numbers for the next few months. If the economy gets unstable the Fed ends up riding the razor's edge trying to stick to policy but not piss off the President. Problem is that the economy can go off the rails faster than the Fed can response. The issue highlighted after 2008 was that "yeah, printing new dollars and buying distressed assets worked pretty well! and no massive inflation so far. But there will be incredible pressure to not raise rates later and if the Fed waits too long to apply the brakes, they won't be able to get ahead of it and inflation will skyrocket."
- hogFeast 5y ago
  Chairman McChensey Martin (who served in the late 60s when all this started to blow up) used to say that the Fed is independent within government. So the Fed is able to develop policy independently but doesn't have room to actually run counter to whatever the Executive is doing. I don't think the impact is necessarily elections anymore, if it ever was. But the Fed was supporting bond auctions through 2020. I don't think it will stop them raising rates but it has stopped them raising rates fast enough imo.
snidane 5y ago
The apparently only empirical study relating interest rates and growth was done by Richard Werner, concluding growth actually historically happened in high interest rate environments, whereas the current economic dogma states exactly otherwise. https://youtu.be/JD2z4l1DiBw https://youtu.be/JD2z4l1DiBw
- imtringued 5y ago
  I don't know what his point is. There is no absolute level of low or high interest rates. Interest rates merely balance the supply and demand of/for labor. Growth usually happens when there is high demand for labor and that means interest rates are high during periods of growth. When you think about it, interest is just the risk adjusted yield of a labor saving investment plus minus bank fees and profit share of the borrower. That means the existence of high yielding investments is what drives interest rates up as lots of borrowers got to the bank and present their fantastic business ideas and the bank picks the highest yielding ones. Well, I also have to say something. Growth didn't really stop with lower interest rates. The economy is much bigger than 30 years ago. Also about negative interest rates, it's a fallacy to think they are supposed to stimulate borrowing. They are supposed to balance people's desire to be in debt with people's desire to hold onto credit (equivalent to demand/supply of labor). That means negative interest rates exist as a disincentive to save money because nobody wants to borrow money.
  - hogFeast 5y ago
    Richard Werner is a bit nutty but his work does have value. He takes a heavily heterodox position on interest rates, some of this is him being misleading in order to be controversial. But his points about the impact of interest rates on bank profits are very trenchant (and btw, the reason why he is a bit nutty is because his professional experience was Japan in the late 80s/90s, that scenario tested all the assumptions about macro and found a lot of them were false, his book Princes of the Yen is good...although, again, very heterodox).

refurb 5y ago

This is the exact situation many financial commentators highlighted post-2008, so I think your historical points are very relevant. The Federal Reserve is supposed to have independence from the government. It will develop its own monetary policy which doesn't need government approval. In reality, the President appoints all the Governors, so people get selected based on doing what the President wants done. The Fed's monetary policy is typically an inflation target - keep the money supply growing to encourage growth, but keep inflation in check as well. The problem is the political influence starts to impact the pure decisions about what's best for the economy. Election coming up? Well, hold off on increasing rates since we need good employment numbers for the next few months. If the economy gets unstable the Fed ends up riding the razor's edge trying to stick to policy but not piss off the President. Problem is that the economy can go off the rails faster than the Fed can response. The issue highlighted after 2008 was that "yeah, printing new dollars and buying distressed assets worked pretty well! and no massive inflation so far. But there will be incredible pressure to not raise rates later and if the Fed waits too long to apply the brakes, they won't be able to get ahead of it and inflation will skyrocket."

hogFeast 5y ago
Chairman McChensey Martin (who served in the late 60s when all this started to blow up) used to say that the Fed is independent within government. So the Fed is able to develop policy independently but doesn't have room to actually run counter to whatever the Executive is doing. I don't think the impact is necessarily elections anymore, if it ever was. But the Fed was supporting bond auctions through 2020. I don't think it will stop them raising rates but it has stopped them raising rates fast enough imo.

snidane 5y ago

The apparently only empirical study relating interest rates and growth was done by Richard Werner, concluding growth actually historically happened in high interest rate environments, whereas the current economic dogma states exactly otherwise. https://youtu.be/JD2z4l1DiBw https://youtu.be/JD2z4l1DiBw

imtringued 5y ago
I don't know what his point is. There is no absolute level of low or high interest rates. Interest rates merely balance the supply and demand of/for labor. Growth usually happens when there is high demand for labor and that means interest rates are high during periods of growth. When you think about it, interest is just the risk adjusted yield of a labor saving investment plus minus bank fees and profit share of the borrower. That means the existence of high yielding investments is what drives interest rates up as lots of borrowers got to the bank and present their fantastic business ideas and the bank picks the highest yielding ones. Well, I also have to say something. Growth didn't really stop with lower interest rates. The economy is much bigger than 30 years ago. Also about negative interest rates, it's a fallacy to think they are supposed to stimulate borrowing. They are supposed to balance people's desire to be in debt with people's desire to hold onto credit (equivalent to demand/supply of labor). That means negative interest rates exist as a disincentive to save money because nobody wants to borrow money.
- hogFeast 5y ago
  Richard Werner is a bit nutty but his work does have value. He takes a heavily heterodox position on interest rates, some of this is him being misleading in order to be controversial. But his points about the impact of interest rates on bank profits are very trenchant (and btw, the reason why he is a bit nutty is because his professional experience was Japan in the late 80s/90s, that scenario tested all the assumptions about macro and found a lot of them were false, his book Princes of the Yen is good...although, again, very heterodox).