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It is based on an out of date theory and President Trump is largely correct to criticize the Fed for prematurely raising the rates because of misperceived expectations about inflation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