Rethinking Rate Cuts: Are We Fueling Inflation Or Controlling It? | Warren Mosler
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You know, a year ago, the forecasts were for probably recession. I don't even remember, but certainly weakness, rising unemployment, that type of thing. Figuring that the monetary policy worked with this long and variable ag or whatever, and it just just hasn't happened. And we went into why it hadn't happened or why it wasn't going to happen or why you could just say the Fed had it backwards along with the rest of the financial community. And that is the fiscal impact of the higher interest rates was dominating, anything that might be happening on the monetary side. The budget deficit was up
Yeah. I wanna double click on a concept there that you brought up in terms of the weighted average maturity of treasury debt. And you had said that, you know, it's the the long term weighted average maturity is about, you know, it's about 3 3.5 percent versus, the Fed funds is at 4.5%. For those that aren't aware of how you look at the economy and and markets and policy overall, Is that how you derive what the the neutral rate or inflation should be? It's based on that.
What you said is interesting, the neutral rate. So what is that? So right now, the Fed will say that's the rate at which, at some spread above the inflation rate, the CPI, maybe 1%, maybe 2%, maybe a little more. And at that rate, it's neither expansionary nor contractionary. So if the rate's too low, it's expansionary, and that's pushing the economy, making the economy stronger. If the rate's too high, it's restrictive. And the fed has at least stated at the last few meetings that they feel that the interest rate that they've said has been restrictive and they want to reduce it back to some n
I'm I'm I'm interested to hear a bit about, over the past 3 years and using a case study of of what the Fed has done over the last 4 years. So if we think about it, obviously, the Fed has brought the Fed funds from 0 to over 5. And during that time, we have seen inflation come down. So I I wanna ask you, is that more so just a spurious correlation and they got lucky and there was other causal factors? Because at the same time, we've seen nominal GDP be quite a bit above most people's forecast during the same time. So are we just is it just a spurious correlation and that's it?
No. So a couple of things happened. They voted to raise rates, and they did. They started raising rates. And at the same time, the Ukraine war hit. And, the Saudis decided to allow the price of oil to go up for a while, and it got up to a 120 in July of 22. And that and if you look that and trace the path of oil prices, It's identical to the prices going up, you know, around the world globally. At, you know, at the same time, the whole inflation thing was a global thing that happened. And at the same time, you had all the supply side things people talked about. You had excess demand from all t
it's It's actually quite interesting. I'm I'm Canadians up here. We do have that in the index here. So by lowering they've been lowering rates,
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