Why doesn't the Fed just hike 200bp all at once?

https://noahpinion.substack.com/p/why-doesnt-the-fed-just-hike-200bp

by bryanwt • 4 years ago

21 7 4 years ago

noahpinion.substack.com

slaw• 4 years ago

Fed doesn't hike the rate so inflation can be high for many years.

jerich• 4 years ago

Although I know financial markets are extremely complex and driven by human psychology, I can’t help thinking about thinking about it in terms of classical control systems.

Do you want a smooth input, or an abrupt step input? Psychologically, I’ve got to believe there would be a quicker response by consumers if rates shot up overnight vs “boiling the frog” with a gradual increases.

In simpler dynamic systems, you get a faster response with overshoot and ripple, maybe this would be similar? But would it be better? I wish the article author had been able to find more discussion by economists talking about the potential effects.

Could you pull out of a recession or pop a forming bubble in months instead of years? Maybe it could lead to a smoother Macro-macroeconomics. But maybe the overshoot is too much; maybe the system is just too chaotic to control effectively.

Financial markets dislike abrupt changes, but I think if the central bank was perfectly transparent about their goals and responses (“To maintain a annual growth rate of 1.9%, Fed decisions will be made based on a PID controller with the following parameters…”), some smart financial engineers should be able to account for the rapid changes in their own models. Maybe there’s even some profit potential anticipating the overshoot and ripple that could provide some dampening effects.

I’m sure I’ve completely Dunning-Kruger’d this and millions of lives would be ruined, but since I’m not the Fed Chairman, we’re all safe.

SilverBirch2• 4 years ago

It seems obvious to me that one thing the fed really strives for is to be predictable. They not only are very transparent in what their goals are, they are transparent about how they view those goals, how they think they'll change over time and how people dissent. So one really obvious reason to not do this is that you're massively going against the most important thing you're trying to acheive: preditabiity.

Why is this important? Because by being predictable, you can allow markets to price in your actions ahead of time and get a sense for whether your planned path is having the intended effect. It's a way of hacking the feedback loop.

MuffinFlavored• 4 years ago

Why couldn’t they have signaled (in the name of predicability) all at once a 200bps hike? Like a 30 or 60 or 90 day warning?

soganess• 4 years ago

I'm interested in knowing this as well!

Maybe because, from the purview of the some parts of the market, saying you are going to raise it is the same as raising it?

I'll be the first to admit that I'm not knowledgeable in these matters, but from the naive perspective, If I was considering market movement I would package in the higher interest rate into my decisions.

As an example, if I was a bank manager that knew the interest rate were going up, I would preemptively advertise higher rates on my loans.

peyton• 4 years ago

Bullwhip effect

SilverBirch2• 4 years ago

Let's say I give you a 90 day warning of a 200bps rise. You price that into your economic activity, you decrease your forward investment and deleverage, this causes a recession (as expected). 89 days later the economy is looking much slower than it was when I made the announcement and inflation is dropping. What do I do now? I told you I was going to raise rates, but conditions clearly now make that the wrong thing to do. But if I don't do it then the next time I guide you about future rates you're going to ignore me.

Why doesn't the Fed just hike 200bp all at once?

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