Scott Sumner  

Kelly Evans on short and long term interest rates

PRINT
Chinese Entrepreneurs in Egypt... The Denunciation Deficit...

One of the most gratifying things about blogging is seeing the quality of press reporting going up over time. One sees more and more news reports that seem to have been influenced by the debate in the blogosphere. A great example is this recent article by Kelly Evans of CNBC:

The public has been seemingly desperate for the Federal Reserve to raise interest rates.

"Savers are getting creamed here," has been a common refrain.

"Banks are getting crushed."

"Zero percent sends a bad message, it undermines confidence."

Even the experts seem upset by the inertia: "It's simply time," has become another popular phrase.

Imagine what would happen, then, if the Fed raised rates--and they dropped even lower, instead. That's effectively what's happening today.

Even if the Fed hasn't raised interest rates, it has stopped lowering them, and it has stopped the balance-sheet expansion that replaced rate cuts once its target rate hit zero.

That, combined with a stronger U.S. dollar, means despite rates still being near zero, the Fed has effectively been tightening monetary policy.


People often complain that rates are low only because of Fed manipulation of the markets. But when the ECB tried to raise rates in 2011 it simply pushed the eurozone into deflation, and longer-term rates fell lower than ever before. Here's some more:

Sometimes, all interest rates are moving higher at the same time. That's because the market thinks inflation will be higher over a longer time horizon, and so demands a higher yield on longer-term securities.

Today though, the market isn't so convinced that inflation will be higher over time.

"More than half the components of the consumer price index have declined in the past six months," observed former Treasury Secretary Lawrence Summers, who just warned that if the Fed raises rates at its next meeting, in September, it will be making a "historic mistake."

The collapse in oil and other commodity prices has added renewed downward momentum to the global inflation cycle. China, the biggest driver of global growth the past decade, is notably slowing and already experiencing deflation on the wholesale-price level. Big markets across the Middle East, Asia, and Latin America are in turn slowing too.

Market-based measures of inflation expectations in the U.S. continue dropping, now pricing in less than 2 percent annual inflation several years out. That indicates "a serious and sustained undershoot of the inflation target," said Michael Darda, chief economist and market strategist at MKM Partners, in a recent note to clients.


Great stuff. Of course I can't be sure that the improved quality of economics reporting is due to the econ blogosphere, but over the past 6 years I've met a number of reporters (including Ms. Evans), and my impression is that they do pay attention to us bloggers. For instance, Ramesh Ponnuru of the National Review has co-authored some articles with David Beckworth.

Ideas matter. I believe Shelley said something about poets being the unacknowledged legislators of the world (which I think is sort of true, if one defines 'poet' broadly), and then Keynes ripped him off with his comment about the world being ruled by the ideas of economists and philosophers. So now I'm ripping them both off with my claim about bloggers.

HT: David Gulley


Comments and Sharing






COMMENTS (5 to date)
Meg K writes:

Interesting theory! If true (and I suspect it is at least partially so), it is the closest to reality that Ender's Game is going to get...

E. Harding writes:

"But when the ECB tried to raise rates in 2011 it simply pushed the eurozone into deflation"
-And the Fed didn't raise rates in 2011, and the Fed still pushed the U.S. into deflation:
https://research.stlouisfed.org/fred2/graph/?g=1GzU

A writes:

Nice article. "Don't reason from a price exchange" is a succinct bit of rightness even if you disagree with market monetarists.

Scott Sumner writes:

E. Harding. Yes, but it's NGDP growth that matters, and those two moved in very different directions. I would add that the eurozone has had lower inflation than the US in recent years.

E. Harding writes:

"in recent years"="only after the passing of the EZ crisis":
http://research.stlouisfed.org/fred2/graph/?g=1GA6
As in the matter of the Great Recession, I can believe it was partly about tight money, but not mostly.

Comments for this entry have been closed
Return to top