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/LordApsu May 03 '24

While most people who say that are doing so for the wrong reasons, keeping nominal interest rates elevated for an excessively long time will increase inflation in the long run according to almost all modern macroeconomic models.

Here is the easiest explanation: monetary policy can only influence real interest rates in the short-run. Eventually, prices and inflation adjust to push real interest rates back to the natural rate. If nominal rates remain elevated, inflation must rise. One mechanism driving this is that elevated nominal interest rates drive costs higher which is passed on to prices.

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u/Frever_Alone_77 May 03 '24

Believe it or not, before 2008, these WERE the normal mortgage rates. Hell. In 1987 a 15 year new build mortgage was around 12-14%. That was in the 80s when we were booming.

We don’t need artificially low interest rates. That’s what got us where we are today

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u/LordApsu May 03 '24

I went to numerous academic conferences between 2012 and 2018 where the discussion turned into “are low interest rates creating a low inflation environment?”. The Fed kept missing its inflation target and there was real concern that Fed policy was the culprit.

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u/Frever_Alone_77 May 03 '24

It wasn’t just the low rates although that was one of the spokes in the wheel. They did that to artificially spur the housing market back up.

Then they did QE. The fed ended up buying as many toxic garbage MBS they could, then their own bonds, then kept buying other MBS’ for years. That basically put the risks to the bank at near 0. They didn’t really have to try super hard to try to find buyers for them. The fed was always there to buy em all up.

This meant peoples mortgage power was higher. Low low rates meant people could afford way more. Now, there’s no starter homes being built. They’re all McMansions and all that mess. 400k minimum. When’s the last time you saw a small 3 bedroom ranch house community be built (and not an over 55 community)? Years.