Re:How This Ends
by credit_guy on Sunday May 22, 2022 @08:16PM
(#31474134)
You are not actually responding to my argument. I was arguing that the Fed does not care about the cost of servicing the Government debt. I wasn't arguing about how much the Fed will hike. They will stop hiking when they consider fit, but the interest on the Government debt will not be one of the factors they'll include in their decision.
They definitely care about second-order effects. If for example they raise the rates enough that debt servicing starts to become a real issue and this leads to higher taxes and spending cuts, then that is an extra economic headwind which they must consider.
They don’t care about the debt figure per se but they do care about the economic implications of that debt, and how other entities are likely to react to it.
> If for example they raise the rates enough that debt servicing starts to become a real issue
then they would've realized they hiked too much. That's why the current Fed hikes are conservative - a lot of people are claiming that they are late, and should've done it earlier, but i think they are doing it right. Slow and steady, and be conservative.
I actually agree that hiking too high is a very poor policy choice for a number of reasons but for your example of fuel, if you kill the demand for it, the price will not skyrocket. On the other hand, however this would also mean that the economy as a whole is dead so again not the best policy choice (but it is likely to rein in inflation)
One of the reasons the Fed keeps factors like servicing the government's debt at "arm's length" is because the debt figures are a political football.
The Fed wants to maintain a balanced, non-partisan position, as much as possible.
Say demand quiets but the price of inelastic goods (gas and food) continues to skyrocket due to greater demand from developing nations who demand more resources to have a better standard of living. How will hiking to 10% fix anything?
Sure you'll kill demand, but you'll also kill financing supply which will only exacerbates the issue over the long run. We need more drilling, more refining, more farming now that Russia is out of the picture and the Saudis are playing games.
Hiking too far is actually a horrible policy choice, and Powell can make a cogent argument about it: he already has mentioned this in hearings. You can't address supply related constraints with higher rates. At some point, they might justify capping rates to finance the needed supply, and that argument smells like the yield curve control of the 1940s. I suspect this argument will become more palatable if we have high unemployment and high inflation. [0]
I have a feeling whatever policy rate they pick will aim to be slightly sub neutral (negative real rates) as they pray inflation resolves itself, while constantly pointing out they have no control over whether Brazil has a successful wheat harvest.
[0]: https://libertystreeteconomics.newyorkfed.org/2020/04/how-th...