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Why I Dissented (medium.com)
129 points by Mz 65 days ago | hide | past | web | 61 comments | favorite

Glad to hear that someone on the Fed has some sense. The confusion of "target" with "ceiling" has been disastrous for the economic recovery. Raising rates now is a terrible idea. Moderate inflation is good for an economy based on credit, _especially_ so when so many individuals are overburdened by overwhelming student loan debt and underwater mortgages. Running under 2% core inflation for the past nine years has destroyed any chance of wage growth or natural debt relief. If anything, we need a few years of 3-4% inflation to make up lost time. Wages need to go up and relative debt loads need to go down, but they never will at 1% inflation when the Fed tightens the screws anytime we get close to 2%.

Raising rates signals things are "normalizing". It may be what's necessary to convince everyone that they really are. A lot of this is about the psychology of the market and sometimes the psychology has to lead the change.

When companies feel things are "normal" they will become less conservative with their investments. With a low interest rates, somewhat counter-intuitively, everyone has been in a fight or flight mode, sitting on troves of cash just because it seems too risky an environment to invest. My personal psychology here has been that if I can't get a good return on my investments I need to build them up rather than spend them. I am also concerned about exposing myself to bubbles. While in theory I should be encouraged to take risks in practice the risks in a low rate environment seem too high, especially if you consider one day the rates must go up.

Historically we've had high inflation with significantly higher rates so I don't think the argument that low rates are a necessary condition for inflation holds. If anything the low rates appear to create deflationary pressure. Wages aren't rising because people and companies are not spending. Japan had low rates for 20 years and that hasn't done them much good. The last 10 year we had unusually low rates and by all accounts other than keeping the ship afloat not too much to show for those. It's time to try something else.

Low rates inflate bubbles. Student loans. Car loans. Real estate. Stock market. Keeping rates too low for too long has many risks and those will grow. The current rates are still historically very low.

The essay actually addresses this right at the end, in the last paragraph before the conclusion:

> One additional consideration that I think about is the possibility that low rates are scaring people and causing them to save more and invest less, while conventional wisdom is that low rates should lead to more investment and less saving. It is not a crazy argument because negative rates seem to be having unexpected results in some countries that have adopted them. If negative rates can scare people into saving more, perhaps very low rates can too? This would be an argument to raise rates just so people can feel more confident. However, it is hard for me to see how high rates by themselves can lead to more confidence, more spending and more investment. Take Japan: Should the Bank of Japan increase rates dramatically to send a confident signal? Does anyone think that would work in jump-starting Japan’s economy? I doubt it. A signal of confidence from higher rates must be coupled with strong underlying economic fundamentals. When the data indicate that we are approaching our dual mandate targets, I do believe markets will take some confidence from our rate increases because those higher rates will reflect strong economic fundamentals. I don’t find a strategy of raising rates purely as a psychological tool a compelling argument.

Right. It's a chicken and egg though. The Fed isn't just raising rates. They're also saying we have full employment, inflation is up, so we can begin to normalize. Rates are still low and the increases are measured. Keeping them low would signal the Fed thinks something is wrong.

EDIT: So far the small increases haven't had any adverse effects. If anything the opposite. So that's one counter-argument. The other thing to consider is that it's not the absolute rate or the derivative of the rate. It's the actions of the Fed vs. the market expectations. The expectation has been set for a long while that the Fed would try to normalize. If anything the Fed has not quite met the expectation. My last point is that the rates businesses borrow at are somewhat disconnected from the Fed rates, at times of higher perceived risk the premium vs. the Fed rate is higher. So the Fed raising rates doesn't necessarily increase costs to businesses.

What is the source of your view, that supports your pro inflation statements?

I have heard this argument before, but only get arguments from authority when I ask for actual data that shows this.

On a microeconomic scale, at least, it should be self-evident that higher inflation benefits debtors, and hurts creditors:

If I owe you $100, and a dollar becomes worth less, I'm better off (since I'm paying you back in dollars that have less real value than what I borrowed).

There is a macroeconomic argument that a predictable and modest inflation rate is good for the economy. Some of the points are:

1) If both parties can accurately predict future inflation, it becomes much easier to negotiate an interest rate for borrowing; if there is much uncertainty about future inflation, then there is extra currency risk added to both the borrower and lender.

2) In the case of deflation, investors will be very cautious, since they become more wealthy just by holding cash.

3) In the case of very high inflation, currency becomes useless as a store of value, so people will rush to convert their currency to something less inflationary.

So if you think that currency should be a useful store of value, that we should encourage those with wealth to invest it in possibly risky endeavors and you want to encourage free-flow of credit by removing some of the risks involved, then those 3 points will be pro modest inflation.

There are of course counterarguments:

A) Free flow of credit has downsides as well as upsides; in particular households with lower net worth have less ability to absorb economic downturns.

B) Forcing wealthy people to invest to preserve their wealth by taking risky investments can create bubbles

C) B+1 means that the bubbles can become highly leveraged.

I think it's just basic macro. Interest rates are low, it's easy to get loans. Interest rates are high, and it's hard. Excessively low, and maybe people make 20-30 year commitments that they aren't ready for.

Like, would we all be better off if maybe student loans were a little tougher to get?

Also, lowering rates speeds up the economy a bit. It's probably better to run a little high, so interest rates can be dropped a little when bad things happen; that'll goose the economy, and power through small rough patches.

Growth is a lagging indicator. By the time the economy is growing too fast, it's too late to yank on the brake.

Or maybe we need a little more boom and bust to stay healthy, like the occasional isolated brush fire that prevents the whole prairie from going up in flames. It could be that Greenspan kept us too steady for too long. Mini-crashes burn away the rotten companies. Ok, I've changed my mind -- you're right, let it heat up.

>Moderate inflation is good for an economy based on credit, _especially_ so when so many individuals are overburdened by overwhelming student loan debt and underwater mortgages.

Inflation is good for borrowers and bad for lenders. I don't see any reason to prioritize borrowers.

By their very nature, borrowers tend to spend money while lenders don't. The total sum of spending in the economy is equal to GDP, so if you care about increasing GDP, prioritizing borrowers makes sense.

At least, that's the basic argument. In practice, what might happen is that the borrowers mostly borrow to make asset purchases in financial markets rather than in the real economy, which is a kind of spending that doesn't count towards GDP.

Savers build up capital stocks. When you consider domestic savers vs external ones, you start to see a weird problem: over time, you sell out all your assets. We're sort of seeing this in real-estate in major cities.

Agree but the real issue here is that the Fed seems helpless with their tool set. They can pump money into the economy but that money is not used for productive but only for speculative purposes. By pushing in more money at the asset side of things they devalue relatively the labor side of things. Re-balancing would require enabling more small scale capital accumulation vs. the current policy of supporting large economic entities.

Perhaps the yearly targets should accumulate, so that if the actual inflation one year was 1%, the target for the next year becomes about 3%.

Doe low rates necessarily cause wage inflation? It might cause inflation in the price of assets or goods while wages stay steady.

Why would the price of labor be treated any differently than any other price. In general, inflation is more dollars chasing less goods and services(where services includes, but is not limited to, individual labor of any sort).

To be fair to your question, inflation does not necessarily mean any individual price will rise, but all of them generally more or less. For example, market forces may cause the price of labor to decrease while most other prices are increasing.

Product inflation could be caused by exchange rate changes, increasing the price of imported goods for example. Low interest rates could funnel more into asset prices than it does to wages. Wages can be competing with foreign labour, automation etc.

I don't agree with the premise (that the dual mandate set by Congress of maximum employment and 2% inflation should be the overarching goal of the Fed) or the conclusion (that the Fed should wait on raising interest rates), but I appreciate the transparency and attention to detail of Mr. Kashkari's analysis. More public officials should publish the reasoning behind their decisions.

Whether you think it's a good idea or not, having the dual mandate be the overarching goal is in fact his job by law so he has to take that position.

I agree that more public officials should publish the reasoning behind their decisions.

BTW I think a single mandate of price stability would be a better choice; perhaps you feel the same way. But that would require an act of congress -- good luck!

> I don't agree with the premise (that the dual mandate set by Congress of maximum employment and 2% inflation should be the overarching goal of the Fed)

What would you propose instead? Anytime they seemingly target something else, they're (rightly, in my opinion) chastised for overstepping their mandate. Are you instead arguing they should have a different mandate? (If not, I don't think we agree on the definition of mandate ;))

The Fed should eliminate the objective of maximum employment from its mandate for monetary policy (automation will kill the notion of "maximum employment" anyways). They should also rethink their approach to inflation and raise the inflation target to 3%. Yields are likely to stay historically low due to the overwhelming demand for the ultimate safe haven asset, U.S. Treasury bonds.

> that the Fed should wait on raising interest rates

I don't agree either. If the economy tanks again, there is almost nothing that can be done, being that one of the usual steps is to lower interest rates to spur growth.

It's the interest rate in real terms (nominal rate minus inflation rate) that spurs growth, so higher inflation itself adds a couple more arrows back into the quiver.

(That's also why deflation is avoided like the plague - in that event, even a zero nominal interest rate is a positive real rate).

I kinda wonder if technical advances means we actually have de facto deflation. Regular stuff is constantly being improved. Perhaps socks are 2% cheaper or better every year, effectively making inflation negative.

This idea is already part of how inflation is measured. It's called Hedonic Quality Adjustment: https://www.bls.gov/cpi/cpihqaqanda.htm

But I also think that this is difficult to get right.

they could always use quantitative easing.

the argument "we need to raise rates so we can lower them if the economy tanks" doesn't fit well with me. its sort of like saying lets take poison so that if we get sick we can stop taking poison and feel better.

it might hold some water if there was inflation, but there's not. deflation is still a bigger risk.

I think the fed should use interest rates to fight inflation, and QE to fight unemployment.

> it might hold some water if there was inflation, but there's not. deflation is still a bigger risk.

I've always wondered if the worry about deflation is overblown. We still have a lot of things that people and businesses buy that have inelastic demand which will not change regardless of whether or not we are experiencing deflation.

Also, when looking at expenses related to computer hardware, it has been going down relative to its capability. That hasn't led to a delay in purchases from either consumers or businesses from what I understand.

I think you're misunderstanding macro-economic deflation vs. technology advancing.

Mass production and technological advancement reduce prices, sure, but whole economic deflation makes debt's real value increase, basically exponentially punishing people holding debt while favoring lenders, where as inflation obviously does the opposite. So, the majority of people with a mortgage, car or student debt get screwed during a deflationary event.

During the 19th century, with money more strongly tied to gold, deflation was pretty common. And it seemed like no big deal.

Of course the evidence is hard to interpret. The 19th century was poorer than the 20th. Well Duh. The had 19th lots of recessions and depressions. But nothing so bad as the Great Depression. But also nothing so good as the Great Moderation.

My guess is that moderate anything is fine. But that policy wonks get the heebie-jeebies about not having the monetary lever in "their" hands.

Under deflation, there is decreasing motivation to work or produce. Why buy seeds to grow food when your money could just buy more later? A little inflation motivates people to produce, either by labor, investment or both.

>Under deflation, there is decreasing motivation to work or produce

Is that only a bad thing? If we have overcapacities and therefore prices fall then producing less would be the rational thing to do. I do understand that this has negative consequences as well though.

> its sort of like saying lets take poison so that if we get sick we can stop taking poison and feel better.

Raising interest rates isn't poison.

Also, at the moment deflation isn't a bigger risk. It says right in the article inflation is slowly rising, not falling.

"Raising interest rates isn't poison."

Higher interest rates are intended to slow down the economy by making borrowing harder.

"Also, at the moment deflation isn't a bigger risk. It says right in the article inflation is slowly rising, not falling."

1.74% is very low, and on the wrong side of target inflation. ~3% inflation is considered historic, and we are no where close to getting there. not even a little bit. if that anemic .03 growth went even a smidgen on the wrong side of 0, that would be bad. so yeah, deflation is still a bigger risk.

>Higher interest rates are intended to slow down the economy by making borrowing harder.

Which is precisely what you need to do to get inflation under control. You may be correct that inflation is too low right now to tighten the screws, but calling interest rates poison is ignoring the reason the fed sets them.

Like unemployment, inflation measures seem to be significantly under-represented in the government's working data. Of course, inflation can never be perfectly measured, even against the cost of commodities, since that assumes commodities are of constant value. This is simply not true -- although values may not change as quickly as new products, almost every commodity is slightly less valuable than it was ten years ago due to marginal improvements in operations, supply-chain, and production technology.

And then you have the impact of oil, whose volatility is derived from difficult-to-predict geopolitics and abundance, making it useless as a short-term inflation indicator and even more useless as a very long term indicator, and yet we heavily rely on it regardless. Might as well include Bitcoin while we're at it. Not to mention the absence of real estate / college tuition / credit card debt in these measurements. Here's an interesting look at some cost comparisons, showing just how difficult it is to capture inflation using a CPI or even PCE approach.


While the author is concerned with meeting his distorted inflation metric on paper before raising rates, there's another reason to keep rates low: the cost of debt is about to rise for the world's largest debtor, and the payment is going to further add to its deficit. If the Fed is only concerned with the short-term problems of the US economy, like it usually is, then it should probably never raise rates.

Take a look at the chart titled "Market-Based Inflation Expectations". What's the rationale for selecting the 19% and 24% percentiles. I assume these are percentiles of all values of the underlying metric recorded throughout the week. If that's the case, why does the subtitle says 'Weekly AVERAGES'?

FWIW, the US Fed is the only major central bank in the world that is substantially privately owned. All of its federal reserve banks are owned and governed by private shareholders. The implicit interests of these stakeholders can be considered as the 3rd mandate, even though it is not encoded in legislation.

I feel like there's an important missing statement: the next meeting of the FOMC is on May 2 [1], so waiting to see if inflation or wages really pick up would not have been a big deal. Most people are arguing we need to raise rates now, but I don't see the argument versus six weeks from now.

[1] https://www.federalreserve.gov/monetarypolicy/fomccalendars....

Kashkari is a chump and my read of this is that he's sucking up the Trump administration who has been critical of the Fed for holding back growth to further his own political aspirations.


That RS article is kinda gossipy garbage, the WaPo article that was written about him in 2009 does a better job illuminating Kashkari.


What has Kashkari done that makes you think he is a "chump"?

It bothers me a little that economists might lack the ability to factor in changing consumer or business habits that are emerging because of recent events or secular trends.

For example:

>One additional consideration that I think about is the possibility that low rates are scaring people and causing them to save more and invest less, while conventional wisdom is that low rates should lead to more investment and less saving.

I will say that even when times are good, but can no longer be assured, people will save more. Moreover, when the costs of economic vulnerability have never been higher, the spending habits of the past no longer work.

Many of us are one pink slip away from permanent unemployment, underemployment, and financial ruin.

Many of us are one chronic - not necessarily life-threatening - illness away from peonage.

It seems unrealistic to expect people to behave as if it's 1957 or even 1987. Jobs for everyone or the threat of nuclear war probably spurred a bit more "live for today" mentality than what we might experience today.

The author operates from the assumption that keeping rates low is stimulative. While true in many and most circustamnces, the Fed took rates to zero on an emergency basis in the 2007-2009 crisis. While originally stimulative over time the evidence that zero rates are providing stimulus is weak in fact it's likely that the harm it does to pensioners, savers and others dependent on the debt markets is not only anti stimulative- it may set us up for a new crisis. In short, the piece is done by someone with no econoic training and super prone to grandstanding and the piece feels exactly like that.

The historic data for extended periods of super low interest rate is "sparse" to put it mildly. Pretty much never happened before, so the "consensus view" by economists is not that much of a "consensus" after all.

Also, historically a leader of the various Feds does not necessarily have to be an economist - similar how supreme court judges don't necessarily have to have a legal/judge background. Given there is a whole committee of opinions, having some "fresh" outsider views may actually help the discussion. (Though I am not saying that having a former Goverment Sachs fellow necessarily is a poster child of fresh ideas here :)

The author is the President of the Minneapolis Federal Reserve.

That's a political appointment- he has zero training in economic theory. He's an ex Goldman lackey that screwed up the financial bailout, tried to run for political office in California then failed and knows about as much about econ as my grandma. President of the a FRB doesn't mean you are trained in economic theory- it's a poltiical appointment period.

Would someone mind to provide a bit more context around what this is about? I'm feeling rather lost reading this.

Kashkari was the lone dissenter in the most recent FOMC meeting, which determines the US Federal Funds Rate.

A decent intro (<25 pages) to US monetary policy (I read it during intro macro), if you're interested: http://www.frbsf.org/education/files/MonetaryPolicy.pdf

US monetary policy is largely governed by the fed, which has 25 branches throughout the USA.

They meet and discuss and then form US monetary policy. You can google and read their decisions.

It's not easy to get up to date with this stuff. You're going to have to put in over 100 hours of study to get a basic handle on the vocabulary.

raising interest rates

Wow, real dissent right here. Central banker votes a bit different on interest rates. It has zero consequences for him. Do you know what would be real dissent? Scrapping fiat money and going back to money that cannot be created out of thin air, proper money.

All money is fiat money. I have no more inherent reason to accept an ounce of gold for my sandwich than a $20 bill. The only value the gold has for me is the expected value others place upon it, which is also the only value I have for a $20 bill. Gold is only useful if we think it is useful. As an industrial metal, it would have nowhere near the present value. Historically discoveries of gold caused the value of currencies to fluctuate dramatically.

People have rose-colored glasses with gold and silver backed currencies, but they were a factor in the Great Depression and directly responsible for several severe recessions and panics.

The gold standard of Bretton Woods also never had enough gold to back it up. It was a fiction the world kindly played along with the US on.

>All money is fiat money.

That's where you started being wrong in your post.

How so? It's a slight exaggeration, but fundamentally correct. Commodity monies would hardly be worth anything without their additional value as a medium of exchange.

With HTTPS-Everywhere the math symbols don't load because the library has a http:// link that should be changed to an https:// links

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The premise that government should dictate the interest rates and not let the market determine rates through price discovery is absurd. 100 of Phd's couldn't predict the housing bubble and the financial crisis of 08 and if you think we are safe from that again, good luck.


Please dont post affiliate links on HN, especially shortlinks intended to hide the actual tagged URL. You won't go far here doing so.

Untracked URL:


The markets do set interest rates on assets. The discount rate is just the rate of loans the Fed offers. The markets have decided to base their rates on the discount rate. Voila, the markets are at work!

I suppose letting the architects of the housing bubble (who also didn't predict it) set the discount rate is preferable?

Not having the ability to adjust the central interest rate has resulted in recessions in the past. It means every recession could be a depression. Interest rates would increase dramatically right as we desperately need them to lower to prevent the economy from going into a tail spin.

Economics is so much more than simply worshiping the invisible hand - if it was nobody would need to get a degree in it. We also need to understand when and how market failures occur.

I'm starting to take great pride in getting downvoted here at "hack" news. There seems be a group think here on this site, in addition to people just commenting on things they have no knowledge about especially when it comes to economics.

I guess I'm just blessed with not running with herd.

The affiliated link, that was my bad. But money is fiat...

There's also a lot of people who think they have a little bit of knowledge when it comes to economics. That's usually much more dangerous than knowing nothing at all about the subject.

Markets do set interest rates on assets. The interest rate is just the rate of loans the Fed offers to banks. The markets have decided to use this rate as the basis for the loans they offer without coercion from the Fed or the government.

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