Interest Rate Debate
By Arnold Kling
There is a 5m-worker gap between household-survey employment today and what it would be if the employment-to-population ratio were at its average level for 2000. This suggests that we are extraordinarily far from anything that could be called “full employment” – and that an appropriate monetary policy would be one that permitted employment to grow at a very strong pace indeed for the next few years.
is highly dependent on the assumption that the employment levels reached in the late 1990s and continuing into 2000 were normal, readily achievable ones that could be sustained over the long run…
The argument that continued monetary slack is necessary to add millions more jobs scares those of us who are skeptical about the wisdom of Keynesian micromanagement in general. Thankfully, it is doubtful that the men and women who sit on the Federal Open Market Committee will swallow the “below potential” argument hook, line and sinker.
I tend to agree with DeLong’s view of the macroeconomic world, even when the internal consistency is a bit tenuous. That is, we believe that there is a bond bubble, which would suggest that interest rates are too low. And yet we believe that the economy is operating below potential, which would suggest that interest rates are too high.
Where I differ with DeLong is that I tend to think of interest rates as being set by the market rather than by the Fed. Yes, I know that the Fed sets the one-day interest rate on Federal Funds. But the long-term bond market has its own views of where the economy stands with respect to potential. And perhaps bond market participants are just as torn as we are between thinking that rates are too low and that rates are too high.
For Discussion. DeLong argues that the economy is unusually sensitive to interest rates right now, because of the significance of housing. Is there a case to made that housing should be more responsive to interest rates now than at some other time?