The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Not Two-Dimensional Chess

09/17/2020

When the Fed meets and especially when the FOMC meets, they issue a written report, which is the most finely perused government report.  Analysts scrutinize every word for any tiny minute change, even the placement of commas (seriously).

It’s latest release promised to keep interest rates low for a longer period than predicted earlier.  Now, it looks like no interest rate increases before 2023 or maybe even 2024.  Because we know higher interest rates help to curb inflation, we want to keep rates low to increase inflation.  The Fed has had a goal of 2% annual inflation for years, as a little inflation really is a good thing.  Unfortunately, the Fed has been unable to achieve even that modest 2% goal.  By offering assurance of “low rates longer”, the Fed hopes to encourage inflationary activities, like increased commercial spending in general and capital spending in particular.   That’s all good news!

After the report is released, there is usually a press conference, which I try to watch.  Yesterday’s conference talked about all that, especially the need for Congress to approve another recovery stimulus, but what I “heard” was concern about deflation.

Inflation is a problem that can be crushed with higher interest rates and political courage.  Deflation is different!  Why would you buy anything today, when you could pay less next week?  Deflation is a killer for both consumer spending and business spending.  More importantly, it is much more difficult to correct.  To correct deflation, popular legend says you need to fight a major war, but the truth is that you need more massive deficit spending — really bigger deficit spending.  I haven’t seen any analysis of this, but I’m confident the cost of encouraging inflation is far less than defeating deflation.  Nobody said that during the press conference, but I “heard” that.

While I do worry about the increasing politicization of the Fed, I sleep better at night knowing they are playing three or four dimensional chess.

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