It’s been quiet in the blogosphere recently; and so, when I saw this story and video with Esther George on Bloomberg I thought I’d share it to help refresh the basis of the debate in which Market Monetarists have been engaged for the last five years.
Ms. George gave all sorts of reasons as to why interest rates should start to rise, except none of them have anything to do with an economy that is overheating or even close to it. In fact, if you watch the video interview that is embedded in the story, right at the top Ms. George is asked about the state of inflation and if that is any indication that interest rates need to start rising. Her answer, and you should watch the interview for the full impact of perplexity, was something like (not a direct quote), “Well, you know inflation can do funny things….” And without elaborating, she then started talking about being at full employment, and having a large balance sheet, and investors reaching for yield, completely evading discussing her responsibilities as rotating, voting member of the monetary policymaking body at an INFLATION TARGETING central bank that targets the PCE index.
If I wasn’t of a mind of extend the benefit of a doubt to Ms. George, I would likely form the impression that she’s gone rogue and that she actually disagrees with having an inflation target, probably the only point we could ever agree upon though not for the same reasons, and instead wants to target interest rates. But even at that, her argument makes no sense given that the graph I posted earlier from the Cleveland Fed shows that real rates are negative. Real rates need to rise or any movement in nominal rates will do more harm than good by being farther above the market clearing level than they are now.
Not generally being of the habit of constructing a strawman that I can punch the stuffing out of, I wish the interviewer had challenged her on some basic economic principles so that she could explain to him and everyone else on what basis she believes rates need to rise, not just allow her to throw out some nebulous folklore that is expected to pass for real macro. She is certainly entitled to her opinion, but if she cannot explain it in a logical and at least somewhat scientific way, she shouldn’t be entitled to a vote on the FOMC.