Will more economists say that Fed waited too long?
I have been saying for more than two years that the Fed should have raised the Fed rate earlier. Now it is too late because the economy is over the top of the business cycle… or as I would say, against the effective demand limit. They should have raised the Fed rate when effective demand was open and available to give momentum. (my recent post on this.)
So I give you this video from Boom Bust. I direct you to the end of the show in the segment called, Big Deal (21:30 minutes [point). You will see across the bottom of the screen, Federal Reserve Tightening Too Late. They talk about why the Fed should have raised the Fed rate earlier. Will more economists end up realizing this? … I think so…
You might also watch the segment of the show with DiMartino Booth. She has said the Fed waited too long too.
Update: Why did the Fed wait too long? This to me is an interesting question. Paul Krugman is kind of upset that the Fed is raising rates now and is unclear why. But ironically, the Fed may actually have been listening to Krugman and DeLong and others causing them to hold off. But eventually the Fed had to get on the normalization path. Yet, waiting until the top of the business cycle is kind of not smart. But they did not know that the business cycle was reaching its top fast… but I did with my effective demand calculation…
They over-estimated the output gap. While I saw less actual potential because I re-calibrated potential lower with a drop in labor share.
So what are you going do?
But if the Fed raises and a recession ensues, how can you say that the Fed raised too late (when the recession was already coming) vs. too early (the raise caused the recession)?
Hello MisterMr,
When there is increasing profit potential in the business cycle, a rise in the Fed rate will most likely not cause a recession. But when the economy has hit the effective demand limit, there is no increasing profit potential… and a rise in the Fed rate can cause a recession.