The verdict on the Fed’s interest rate hike

Good job, people.  Just to recap what has been my perspective, here is from my September post, The Paradox of No Market Response:

…the good news scenario is if the Fed’s decision doesn’t matter much for the markets.  Woe unto you if your economy is so fragile that a quarter point or so in the short rate, mixed in with some cheap talk, were to matter so much.

So if at first prices were to stay steady, following any Fed decision, then equities should jump in price.  That is the “no news is good news” theory, so to speak.  It’s a better state of the world if it is common knowledge that the Fed’s actions don’t matter so much in a particular setting.

Equity markets did in fact rise across most of the world, after a slight period of no reaction.  And I wrote:

If I were at the Fed, I would consider a “dare” quarter point increase just to show the world that zero short rates are not considered necessary for prosperity and stability.  Arguably that could lower the risk premium and boost confidence by signaling some private information from the Fed.

Someone at Bloomberg — I can no longer remember who — wrote at the time that this was the worst possible argument they ever had heard in favor of what the Fed was thinking of doing and subsequently did.  Was itOther commentators today have called this a “risk rally,” namely that fear of a prior risk seems to have diminished.

And to recap some broader points:

1. In most periods of crisis, central bankers are too reluctant to use expansionary monetary policy soon enough or strong enough.

2. However true that may be, it doesn’t describe our current situation.

3. Beware of models which rely too heavily on the Phillips curve, and two-factor “inflation rate vs. unemployment” considerations, especially in “long run” situations.  I don’t see that any of the commentators working in this tradition had good predictions this time around.

4. The successful “lift off” still probably won’t matter very much, but better a success than not.  Don’t think that America’s major economic problems somehow have gone away.


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