Why do you think rates need to be higher? Inflation has been to high or unemployment has been too low?
And I've never heard anyone say the fed caused the 2008 recession. It's pretty much universally agreed upon it was finance blowing up.
And I've never heard anyone say the fed caused the 2008 recession. It's pretty much universally agreed upon it was finance blowing up.
But it's also a bit philosophical, because any causal claim implicitly invokes a counterfactual. Like, if a bus drives off a cliff, was it the fault of the cliff or the bus driver who didn't respond quickly enough in trying to steer away? To me, common sense says that sometimes it's the cliff's fault and sometimes it's the driver's fault - the difference depends on how early the driver 'should' have known.
It's just a weird use of the word caused that gives people the wrong impression a lot of the time. If I say "Fireman Rick caused that house to burn down" most people will think Fireman Rick is an arsonist and not necessarily that he didn't act swiftly and quickly to put it out. And then if you say most houses burning down were caused by firemen many people might get the wrong impression that if we got rid of the fire department less houses would burn down instead of more.
P.s. I know Milton Friedman is to blame for this terribly tortured use of the word.
Or to give it more of a HN spin: if Rick's job was to run a website, but hackers broke in and stole all the plaintext passwords, it could be construed as partially Rick's fault for negligently storing the passwords in plaintext, even though the hackers were the ones directly responsible for the hack.
In an inflation-neutral environment, one would expect the prices of manufactured goods to be trending slowly downwards. After all, producing something less expensively is exactly what economic competition leads to.
The big pool of money has been sloshing between asset classes for a while now, but it doesn’t get reflected in inflation metrics.
If the government increased interest rates until inflation was zero unemployment would be twice what it is right now. And that seems like a high cost to pay for a neutral monetary base.
https://en.wikipedia.org/wiki/Federal_funds_rate#/media/File...
Note the massive drop (stimulus) in the early 2000s. That pushed debt levels up and encouraged the crappy loans and all that. Then the rapid increase set it off. Home prices vary inversely with interest rates, so raising them rapidly cooled the market and put all that cheap debt under water.
The fed funds rate was around 4.5% in July of 2007 before the shit hit the fan. We need room to cut interest rates to spur growth when the next recession hits. 2.25% isn't a very big margin.
But the only way to a higher nominal interest rate while keeping the same real rate is too raise the inflation rate to 3 or 4%.