The Federal Reserve‘s obsession with imminent inflation – for once I agree with President Trump

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It is  based on an out of date theory and President Trump is largely correct to criticize the Fed for prematurely raising the rates because of misperceived expectations about inflation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.

 

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About haroldchorneyeconomist

I am Professor of political economy at Concordia university in Montréal, Québec, Canada. I received my B.A.Hons (econ.&poli sci) from the University of Manitoba. I also completed my M.A. degree in economics there. Went on to spend two years at the London School of Economics as a Ph.D. student in economics and then completed my Ph.D. in political economy at the University of Toronto. Was named a John W.Dafoe fellow, a CMHC fellow and a Canada Council fellow. I also was named a Woodrow Wilson fellow in 1968 after completing my first class honours undergraduate degree. Worked as an economist in the area of education, labour economics and as the senior economist with the Manitoba Housing and Renewal Corporation for the Government of Manitoba from 1972 to 1978. I also have worked as an economic consultant for MDT socio-economic consultants and have been consulted on urban planning, health policy, linguistic duality and public sector finance questions by the governments of Manitoba, Saskatchewan,the cities of Regina and Saskatoon, Ontario and the Federal government of Canada. I have also been consulted by senior leaders of the British Labour party, MPs from the Progressive Conservative party, the Liberal party and the New Democrats on economic policy questions. Members of the Government of France under the Presidency of Francois Mitterand discussed my work on public sector deficits. I have also run for elected office at the municipal level. I first began to write about quantitative easing as a useful policy option during the early 1980s.
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