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June 14, 2005

Mark Thoma and Barry Ritholtz on Interest Rates

They write, in an Econoblog:

WSJ.com - Where Will Rates Go From Here? Experts Consider the Fed's Path: Mark Thoma, of the University of Oregon, and Barry Ritholtz, of Maxim Group, consider the possibilities....

Mark Thoma: ...as I look at unit labor costs, core PPI, core CPI, inflationary expectations, productivity, output and employment relative to potential, housing markets, and energy costs and ignore the inevitable month-to-month blips, I see trends that indicate rising inflation. Thus, heading off potentially destabilizing inflation and keeping inflationary expectations anchored requires continued tightening at the measured pace established by the Fed....

Barry Ritholtz: Inflation targeting is a nice idea in theory, but... the Fed has been much more active, undertaking a far broader set of policy initiatives.... many of the Fed's action... can be viewed as the central bank careening from one Fed-created problem... to the next... inflation fighters and deflation vigilantes, bubble enablers and now bubble deflaters... tax policy... deficits that policy created... money-supply junkies... the "conundrum" of the yield curve or the "irrational exuberance" of investors... Social Security privatization.... The Fed's authority has led them into battles where they have little influence and less authority, and where they end up doing far more harm than good...

Mark: Those in the "old school"... are not in favor of explicit inflation targeting... because it reduces the Fed's flexibility....

Barry: The chairman's job is extremely difficult, and that -- regardless of what he does -- some wonk somewhere will label him incompetent. That said, calling the Fed's actions a "mistake" is quite an understatement.... The Fed has... tried to moderate the impact of normal market cycles.... But... the longer we wait to pay the bill, the worse it ultimately will be.... While I am not convinced that the housing market is a bubble -- yet -- the negative impacts of too much easy money will be increasingly unstable structural imbalances...

Mark: James Hamilton... makes the case that in the past the Fed has lowered interest rates past the time when it's appropriate on downside, and increased rates for too long on the upside.... This is a delicate balancing act for the Fed.... I'm not convinced that evidence of weakness in output growth or in price pressures have subsided enough to justify a change in the current path of measured increases in the federal-funds rate.

Barry: Mark, I see your expectations for two more hikes .. And as long as we are making predictions, I will raise you a new series of rate cuts (yes, cuts), beginning mid-2006. Why? 'Cause the Fed will... careen from one "situation" of their own creation to another.... [N]early half of the private sector jobs created since the Recession ended in 2001 have been in housing and related industries. That makes them a direct product of the ultra-low rates we've had, thanks to the Fed overshoot to the downside...

Posted by DeLong at June 14, 2005 04:11 PM