2024-04-11 Th: Scratchpad: No, for the Federal Reserve to Cut Interest Rates by 25 Basis Points in June Would Not Be a Mistake...
A scratchpad…
Economics: I agree that a 25 basis-point Federal Reserve rate cut in June would as a mistake be one “comparable to… [those] the Federal Reserve was making in the summer of 2021…”, but that is because I believe that there was no mistake then—that the Federal Reserve was playing it completely right in the summer of 2021.
That is because of the asymmetry in the loss function. You cannot effectively stimulate the economy if you land at the zero interest-rate lower bound. By contrast, you can always effectively restrict the economy by raising interest rates wherever you are.
Thus waiting to raise rates until you were almost sure that you would not soon be back at the zero lower bound, and then moving fast and far, was in fact optimal monetary policy in the summer of 2021. And that is what the Fed did.
There was no error.
There would be no error in cutting by 25 basis points in June.
But even if it would be an error to cut by 25 basis-points in June, that would be a small beer policy move compared to Fed forbearance in the early Biden years. Monetary conditions as indexed by the Treasury Ten-Year TIPS were kept very loose by the Fed until the start of 2022. Between then and August it tightened by 350 basis points: lowering the real value of the future ten years out by about 35%. That is a huge shift in the intertemporal price system.
A 25 basis-point cut in June with an 0.4 gearing to the Treasury Ten-Year TIPS would raise the real value of the future ten years out by about 1%.
How can these possibly be seen as moves comparable in magnitude?
Lawrence Summers: ‘On current facts, a rate cut in June would be a dangerous and egregious error comparable to the errors the Federal Reserve was making in the summer of 2021. We do not need rate cuts right now… <bloomberg.com/news/articles/2024-04-10/…>