Paul Krugman worries that the reason why the Fed hiked by a quarter point in December 2015, and won’t immediately reverse course, is that their judgement has been impaired by talking to too many who work in banking, which industry suffers from very low interest rates.
As Paul noted in one of his earlier blogs, there are those on the right of the Fed who think that rates are so low, and quantitative easing was undertaken, as part of a liberal conspiracy to help Obama; or, to impoverish those who live off savings.
If I was on the FOMC, I’d probably feel comfortable that there were conspiracists accusing me of having been corrupted by interest groups on opposing sides.
Addressing PK’s most recent charge, his worry seems pretty unlikely to me. The FOMC had no problem dropping interest rates like a stone – from 5.5%, to 0.25% – when the crisis hit, and holding them there for almost seven years. All of a sudden, because rates are put up by 25 basis points, this is evidence of a pro-bank bias? I don’t buy it.
Concern about banks wasn’t mentioned as part of the narrative about raising rates; so we have to believe that somehow banking contacts distorted the information about the rest of the economy in favour of their ulterior motive. And that that survived battle with the prominent Fed staff view, delivered by Laubach and co.. And continues to survive the temptation to gossip disapprovingly about it to other private sector contacts. Unlikely.
Even if this concern had figured materially, there would be a prima facie case for thinking it through. Recall the UK Monetary Policy Committee’s argument for not cutting rates below 0.5% [a floor since revised down]. Lowering rates beyond some point would harm bank profits and cause them to push up lending rates, undoing much of the effect of the central bank interest rate cut. Less finance is bank intermediated in the US, and there is a greater proportion of fixed-rate loans to the personal sector. But the argument holds true in principle.
At the time of the December hike, I thought there was a pretty good case for it. I doubt, however, that if the FOMC had had special foresight into the market chaos that would unfold subsequently that they would have moved then. Which leads me to think that, other things equal, they ought to reverse course now. And that we might conjecture that one thing that is stopping them is, not a surfeit of nice dinners with the head of bank treasury operations, but a worry about seeming to look stupid by changing course so quickly: a worry I’d hope could be set aside when the stakes are so high.