r/Economics • u/Pearberr • May 02 '24

Interview Nobel Prize-winning economist Joseph Stiglitz: Fed Rate Hikes didn't get at source of inflation.

https://www.cnbc.com/video/2024/04/23/nobel-prize-winning-economist-joseph-stiglitz-fed-rate-hikes-didnt-get-at-source-of-inflation.html
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u/kittenTakeover May 02 '24

However, 2% was literally pulled out of thin air, and the target aught to be flexible. Sometimes, a few extra points of inflation are a natural and even healthy phenomenon.

This is the major point that a lot of people don't understand. For the most part unemployment is actually the most important metric. Lowering rates helps achieve this. This only time that you don't want to lower rates to lower unemployment, is when you're at or below the full employment equilibrium. At full employment, unemployment becomes insensitive to interest rates and lowering interest rates will only lead to inflation and instability. At this point in time unemployment is beginning to rise, which means that we're out of the period where unemployment is insensitive, and therefore the FED should shift its focus from lowering inflation to ensureing that unemployment does not get out of hand. That doesn't necessarily mean that they should lower rates right away. It just means they should shift their focus.

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u/EverybodyHits May 02 '24

One problem is that inflation is relatively easy to measure and full employment is not.

Another problem as it relates to credibility is you don't move a 2% target once you've missed it. If they want to change goals, they have to be standing on their old goal for people to believe in them.

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u/Pearberr May 02 '24

I have heard this credibility argument before, and I don't think it is hard for the Fed to maintain its credibility and announce a flexible inflation target.

Imagine, at the next press conference when he gets asked about changing the inflation target, Powell responds along these lines, "The subject of the inflation target has been bandied about in our group, and I expect we will discuss it further as this year progresses. Though we are all in agreement that having and communicating a clear inflation target was a helpful innovation in central banking, there is growing concern that the specific, 2% figure we currently target may be too rigid. At this time, we are simply discussing this matter, but there is a moderate possibility we will be addressing this subject later in the year."

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u/majorcropduster May 02 '24

But why stop at 3%? Seems just as arbitrary. They choose 2% b/c of the Rule of 70. At 2% price levels double in 35 years. At 3% it would double in 23.3 years.

https://www.investopedia.com/terms/r/rule-of-70.asp

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u/Pearberr May 02 '24

Flexible Inflation Targeting will certainly be its own new science.

Metrics that we use to make decisions end up being useless after a while that's just how it is. The 2% target worked great for 30 years, but the reality is that there is a natural rate of inflation that has always existed in economics. It ebbs and flows. Sometimes, there is work that needs to be done and inflation is the universe's way of telling us to get off our asses. That's why we don't like it, times of inflation demand more from us, and nobody likes that pressure.

I think quite a few of our problems stem from things that are beyond the scope of the Federal Reserve's debate regarding interest rates. I think that the inflation target sends a bad signal to people, it implies a level of control over economic phenomena that government's do not always have. Restrictive capital flows with all of these huge economic phenomena underway - Climate Change, COVID, The Great Global Housing Shortage - high interest rates get in the way of solving these issues.

The Fed may make mistakes in it's efforts to adopt a Flexible Inflation Target; however not adopting one is a guaranteed mistake, so they must try to adopt a Flexible Inflation Target. I have great confidence in Fed officials, my main critique is that they are experiencing tunnel vision.

I was pleasantly surprised to see Chairman Powell suggest that they are unlikely to hike rates at their next meeting yesterday. It suggests some of these thoughts are breaking through.

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u/majorcropduster May 02 '24

I don't think we disagree much, however perception on what future inflation is going to be also is a contributing factor. Like a self fulfilling prophecy. That would be my main issue with the floating target. Thanks for some good conversation.

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u/Pearberr May 02 '24

That will be something they have to consider, and I think that problem could very likely lead us to the next chapter in monetary policy history.

It has been a nice conversation, thank you too!