Some thoughts ahead of this year's Jackson Hole meetings.
Thanks so much for that link to the Treasury report explaining the boom in non-residential construction. I thought, whoaa--surely, that can't be commercial construction? Why would anyone be investing in construction with such high interest rates? And it turns out that the boom is in manufacturing construction, largely owing to the infrastructure jobs Act, the Chips Act, and the IRA.
What we can't know is the counterfactual of what would have happened if the Fed hadn't raised interest rates while all this Federal stimulus was kicking in. You seem to think inflation would have come down on its own; but maybe the economy would have run much hotter if the Fed had done nothing?
It is interesting that the shelter component of inflation is the big driver of the CPI now. This tends to reduce the construction of new housing (putting yet more upward pressure on this component); and apparently, the inventory of existing homes for sale remains very low. So, if Powell sticks to an inflation target of 2%, it looks like much higher interest rates are in store, because I suspect the shelter component will be hard to reverse otherwise.
The $64 million dollar question is: could/would the Fed raise interest rates enough to tip the economy into recession (i.e. cause a "hard landing"), and how much voter pain would be felt in the middle of the 2024 elections?
There are Executive actions that could alleviate inflation and interest rates rather quickly, if needed, e.g. if a recession does set in by early 2024, imperiling D's prospects. Things would get pretty desperate if Trump becomes the Republican nominee. Biden could, for example, unilaterally end the sanctions on Russian oil, gas, food and fertilizer as a peace gesture. The voters in the U.S. and everywhere else would then see immediate relief at the grocery store and at the pump, due to the speed of information transmission in the global markets. Is that a fantasy? Who knows. My fantasy is that, to save the day, Biden declares a "sanctions halt" the way LBJ declared a bombing halt in 1968 (to launch the Paris Peace talks with North Vietnam). Of course, LBJ also announced that he wouldn't seek re-election. Biden would have to do likewise, as the D base is imploring him to do anyway.
Can anyone out there explain how higher interest rates can counterintuitively lead to HIGHER inflation? I understand that higher interest income increases spending power, but isn't the vast majority of this income accruing to the top 10%? They've already bought all the toothpaste and toilet paper they need, and I don't care if they spend it on a new yacht or a summer home on Martha's Vineyard. So why would this interest income put pressure on the prices of necessities?
Key citation: 'Powell insisted that the only way to bring inflation down was to deliberately stifle growth and “soften the labor market” (i.e. push the unemployment rate higher)'. In his eyes, apparently, the only significant driver of inflation is raising wages and the only cure is increased unemployment. In other words, the major role of the central bank is to maintain or increase the level of inequality.
The other thing that's missing is any consideration for environmental issues (e.g, global warming) - which should be hard to ignore these days. Unfortunately, for economists, money seems to be the only resource that counts. Realistically, economics is (or should be) a biological science.
John, thanks for commenting. I suppose the argument can be made that the uber wealthy play a game of "Whover dies with the most toys wins." So the rich are buying lots of stuff that aren't necessities, but those "toys" are being built by working people who do need the money to make ends meet. So it's not the excessive spending of interest income by the wealthy that directly causes inflation, it's the spending of the workers receiving that interest income in the form of wages that can eventually put pressure on prices.
Thanks for all the updated information, Dr. Kelton. Keep doing what you are doing! Disingenuous Trolls will be Trolls.!
I'm perplexed and disappointed why the MMT team ,which I understand lists a Government Guaranteed Jobs Program as your no# 1 policy to right so much of what is wrong with our economic/fiscal/social/political systems ,rarely if ever is mentioned in the Lens or other MMT
offerings--the general public needs broadly educated/awakened to GGJP and would quickly
understand it's potential to help close the destructive inequality deep in the wealthiest country
ever in history