Dollars and Jens
Thursday, October 15, 2015
positive interest rates
Traditionally the reason a central bank raises interest rates is to reduce financing activity that supports "aggregate demand" that might lead to inflation. Inflation and its expectations seem to be low — below the official 2% target for quite a while — which makes me at least cautious about this, and yet I support an interest rate hike at the next FOMC meeting. Here is a smattering of reasons why:
The recurring theme is mostly that moving away from zero when we aren't in a hurry to raise rates leaves more flexibility to handle the unexpected than raising rates when we are in a hurry would.  It should be clear from the reasons that I'm not proposing or expecting that we begin an unbroken string of 25 bp hikes at each meeting for the next two years; if we had two such hikes and saw a slight uptick in inflation and the participation rate, I would support holding rates there for a while until we got a stronger signal that more sustained inflation was coming, even if it might allow some corners of the market to collect risky securities at unsafe leverage.

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