Alan Blinder once served as Vice Chairman of the Federal Reserve Board, and now has a new piece in the Wall Street Journal. Michael Darda sent me the following email in response:
Alan Blinder in today's WSJ, arguing, as some Fed officials have, that it's not the start/timing of the initial rate hike/tightening that matters, it's the trajectory. This is just incredibly wrongheaded in virtually every respect. If the Fed is overlooking a passive tightening in monetary/financial conditions and a concomitant drop in the eq. short rate and then compounds it by actively tightening instead of easing, the "trajectory of short rates" will be very shallow indeed. The "path" of short rates was "only" 25 bps in Japan in 2000, "only" 50 bps in Japan in 2006/7 and "only" 50 bps in the EZ in 2011. And the outcomes were all consistent with monetary policy failure. Memo to Blinder: Never reason from an interest rate path.
This is a very important point. In the three episodes mentioned by Darda, the trajectory of interest rates was extremely flat, after the initial increase. And yet in all three cases monetary policy was far too contractionary, and in all three cases the country (or region) again fell back to the zero rate boundary. The Fed may avoid that mistake, but it won't be because a flat interest rate trajectory means easy money. I'd guess that about 90% of interest rate movements reflect the condition of the economy, and 10% reflect Fed policy.
Blinder's right that the future path of policy is very important, but wrong in assuming that the future path of interest rates tells us anything useful about the future path of policy.