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Or, more likely, inflation is falling because interest rates are rising. Interest rates staying low because of pandemic fears is the reason we had this gigantic

by alexb_ 4y ago

Or, more likely, inflation is falling because interest rates are rising. Interest rates staying low because of pandemic fears is the reason we had this gigantic inflation - interest rates rising to levels that are actually reasonable are causing inflation to slow.

neffy 4y ago
Interest rates are a second order impact on the money supply, high enough interest rates may stop monetary expansion - if they reign in lending. This works fairly well in the states where the fixed rate long term loans provide a huge disincentive to new lending (say moving to a bigger house), but not so much elsewhere (it is actually possible to have both high inflation/monetary expansion, and high interest rates - it depends a lot on details of the local financial system and its regulation.) So its probably correct to say that the monetary contraction the US is currently experiencing is due to high interest rates, but that doesn't stop the inflation that has already been caused by initial money printing.
jonnycomputer 4y ago
There is a significant lag between rate changes and effect, unless its a second-order expectations effect. Following folks like Noah Smith and Brad DeLong[1], I suspect that it isn't the rate hikes, and the rate hikes are actually threatening an uneccessary recession. [1] https://noahpinion.substack.com/p/is-the-fed-hiking-too-fast https://noahpinion.substack.com/p/is-the-fed-hiking-too-fast
dragonwriter 4y ago
> Or, more likely, inflation is falling because interest rates are rising. Yes, the existence of the Fed and the fact that it does monetary policy is part of the given for most of the people who predicted the inflation surge would turn out to be transitory, rather than durable. > Interest rates staying low because of pandemic fears is the reason we had this gigantic inflation They are a factor, more precisely, the combination of monetary and fiscal stimulus enacted in response an economic slowdown that, in retrospect, turns out to have been both one of the most rapid on record, but also extremely short and with a rapid rebound, overshot in monetary effect terms, leaving the US largely all in on stimulus during one of the most powerful economic rebounds in history.

by alexb_ 4y ago

neffy 4y ago

Interest rates are a second order impact on the money supply, high enough interest rates may stop monetary expansion - if they reign in lending. This works fairly well in the states where the fixed rate long term loans provide a huge disincentive to new lending (say moving to a bigger house), but not so much elsewhere (it is actually possible to have both high inflation/monetary expansion, and high interest rates - it depends a lot on details of the local financial system and its regulation.) So its probably correct to say that the monetary contraction the US is currently experiencing is due to high interest rates, but that doesn't stop the inflation that has already been caused by initial money printing.

jonnycomputer 4y ago

There is a significant lag between rate changes and effect, unless its a second-order expectations effect. Following folks like Noah Smith and Brad DeLong[1], I suspect that it isn't the rate hikes, and the rate hikes are actually threatening an uneccessary recession. [1] https://noahpinion.substack.com/p/is-the-fed-hiking-too-fast https://noahpinion.substack.com/p/is-the-fed-hiking-too-fast

dragonwriter 4y ago

> Or, more likely, inflation is falling because interest rates are rising. Yes, the existence of the Fed and the fact that it does monetary policy is part of the given for most of the people who predicted the inflation surge would turn out to be transitory, rather than durable. > Interest rates staying low because of pandemic fears is the reason we had this gigantic inflation They are a factor, more precisely, the combination of monetary and fiscal stimulus enacted in response an economic slowdown that, in retrospect, turns out to have been both one of the most rapid on record, but also extremely short and with a rapid rebound, overshot in monetary effect terms, leaving the US largely all in on stimulus during one of the most powerful economic rebounds in history.