Much ado about nothing

As all the world knows, the Fed announces tomorrow whether or not they go through with a  rate hike. Social and old media are choking with punditry denouncing the possibility.

I say, “meh”.

Sure, asset markets will probably swing tomorrow, but there’s nothing in the Fed’s plans that would have any real influence on the fundamentals of the real economy.

How so?

Firstly because rates will still be really low after the “hike”. I’m not sure how they will state it, but the current position is a range “from 0.0 to 0.25”. So suppose it’s announced a new range from .25 to .5. Katie bar the door!

Secondly and I cannot stress this enough, monetary policy really has little to do with economic prosperity. Sure draconian tightening or hyperinflation can mess up an economy, but we are nowhere near that point. There is precious little evidence for the US that monetary policy affects output or employment.

Of course that’s the last thing you would conclude from the raging progressive punditry of the past few weeks.

Now it is true that inflation has been below the Fed’s target for like 3 straight years and the Fed doesn’t forecast it to hit the target until 2017, but rest assured, our economy, left to its own devices, won’t even notice the looming hike.

Again, I do expect asset markets to gyrate, but I don’t hold to a Sumnerian linkage between short term swings in asset prices and permanent changes in economic fundamentals. I’m more of a Shillerian when it comes to asset markets.

One thought on “Much ado about nothing

  1. I have to agree. I have the feeling it might even help. Economies with interest rates at the lower bound haven’t shown huge growth in response (in particular in the case of Japan), leaving me to wonder whether zero rates actually discourage economic growth and stability (perhaps because nobody can get a decent, safe savings rate).

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