President Donald Trump has done and said many negative things in the policy realm that I strongly disagree with. But on the subject of the Fed policy of restoring higher interest rates because of the supposed threat of inflation, I must say I believe that the Fed is following the wrong policy.
It is based on an out of date theory and President Trump is largely correct to criticize the Fed for prematurely raising the rates because of misperceived expectations about inflation automatically increasing as lower unemployment prevails for an extended period of time. It is true that the Fed has raised rates by very small amounts in an effort to return to what it calls more normal rates of interest. But its also true that that it appears to base its decision on a variant of the natural rate of unemployment and the old Wicksellian argument about the natural rate of interest. But this ignores or misunderstands and under appreciates the enormous impact of the crash of 2008 and the sharp rise in unemployment and banking fraud that followed it. Friedman‘s old argument which was based on monetarist orthodoxy has been disproven by the history of the past decade. This doesn’t mean inflation can never be a problem. But it does mean that we can expect that inflationary expectations are much less likely than in previous decades. The punch bowl of low interest rate stimulus can be left on the table somewhat longer. Furthermore the era of the revolution in information technology, developments in the energy industries and the rising educational levels of the population all contribute to keeping price rise disciplined except in special markets like real estate where the supply of stocks are constrained. There needs to be a wide ranging debate of these kind of issues and President Trump is correct to raise them. See my 2004 Adelphi University paper presentation to the Conference on Social Policy. It is posted on this web site on September 19, 2011.
RESTORING FULL EMPLOYMENT: THE NATURAL RATE OF INFLATION VERSUS THE NATURAL RATE OF UNEMPLOYMENT – https://haroldchorneyeconomist.com/2011/09/19/restoring-full-employment-the-natural-rate-of-inflation-versus-the-natural-rate-of-unemployment/
by HAROLD CHORNEY,GRADUATE PROGRAM IN PUBLIC POLICY AND PUBLICADMINISTRATION,DEPT. OF POLITICAL SCIENCE , CONCORDIA UNIVERSITY, MONTREAL
Paper presented to the Conference on Social Policy as if People Matter, Adelphi
University , Garden City , New York, Nov.12, 2004. Many thanks to Helen Ginsburg and Trudy Goldberg for their kindness in including me in this very interesting conference.This paper is also a preliminary version of a chapter in my forthcoming book.
March 25 2020 , The current Covid19 crisis and the American and Canadian response to it by both the President and the Congress and the Fed is once again proof that Keynes is still very relevant and critically important in understanding how to fund countervailing policy to rescue the economy and society when it is attacked by a horrible scourge pandemic that tragically will cost the lives of many thousands of people world wide. There no longer is talk of excessive deficit spending, fear of inflation , condemnation of printing money and the whole range of deficit hysteria. Once again its crystal clear that massive disinflation and probable deflation will be the order of the day for awhile despite enormous deficit spending and large bouts of QE which Keynes, Lerner , Takahashi,called for in the 1930s and Hotson, Seccareccia and myself called for more than thirty years ago. Despite the barrage of criticism we faced we were correct in arguing for the wisdom of this set of policy tools.
What about consideration to cheap money fuelling the real estate and IT stocks, artificially increasing their prices?
Yes that can be a problem as asset bubbles may well develop. But there is remedy in greater regulation of the financial markets and where appropriate the real estate markets. there is no perfect solution but since we are still in the shadow of the 2008 financial crisis I prefer to err on the side of avoiding a major collapse in employment and growth due to premature tightening by the FED.