The monetary-policy gap between insiders and outsiders — between economists at the Fed and other policy institutions, who still seem eager to raise rates, and those of us on the outside, who think this is a really, really bad idea — continues to widen. This morning Tim Duy — one of the outsiders who, commenting from his perch at Mark Thoma’s invaluable blog, has seemed most sympathetic to the urge to hike rates — joins the what-are-they-thinking chorus. Core inflation is drifting downward, not upward, and is now well below the Fed’s target. So why hike?
The immediate answer appears to be a fixation on the unemployment rate, which is close to standard estimates of full employment. But is this really a solid justification for raising rates absent any actual sign of the rising inflation we’re supposed to see at full employment?
Actually, what do we mean by full employment, anyway?
The standard textbook answer identifies full employment with the NAIRU, the unemployment rate at which, according to natural-rate theory, the inflation rate is stable; anything below that and inflation should be higher each year than the year before. But the Fed itself isn’t using NAIRU-type models these days, as far as I can tell, because the data don’t look like that. If anything, what we see is more of an old-fashioned Phillips curve with a downward-sloping relationship between unemployment and inflation. Here’s unemployment versus core inflation, annual data, since 2007:
The more or less standard explanation for this reversion to old-style Phillips is that inflation expectations are “anchored”: everyone expects the Fed to achieve its 2 percent target, so the expected-inflation term in the curve just sits there, it doesn’t move around based on year to year fluctuations. But in that case how do we define full employment?
The answer, I’d suggest, is that full employment would be the unemployment rate at which these anchored expectations are borne out by experience — because if inflation is consistently above or below the target long enough, presumably the anchor rips loose. So we should be looking for the AIEE inflation rate — Actual Inflation Equals Expectations, pronounced Aiee! FWIW, AIEE = 4.9. OK, FRB?
You don’t want to push this too hard, but my point is that recent data are perfectly consistent with the view that full employment requires an unemployment rate below 5 percent; the most recent data would suggest an even lower rate. This might or might not be right; I don’t know. But the Fed doesn’t know either.
And in the face of that uncertainty, the crucial question is what happens if you’re wrong. And the risks still seem hugely asymmetric. Raise rates “too late”, and inflation briefly overshoots the target. How bad is that? (And why does the Fed sound increasingly as if 2 percent is not a target but a ceiling? Hasn’t everything we’ve seen since 2007 suggested that this is a very bad place to go?) Raise rates too soon, on the other hand, and you risk falling into a deflationary trap that could take years, even decades, to exit.
I really, really hope this is getting through.
Fonte: http://krugman.blogs.nytimes.com/2015/02/03/tough-fedding/?module=BlogPost-Title&version=Blog Main&contentCollection=Opinion&action=Click&pgtype=Blogs®ion=Body