The thing we’re all waiting for in economic policy at the moment, by far the most important thing we’re waiting for, is when is the Federal Reserve going to raise interest rates and when it does by how much? Anyone who can actually divine both of those two numbers can position themselves ahead of time and thus make very good profits. Our problem, the Fed’s problem, is that no one really knows, amid the fog of economic numbers, exactly what is going on. So, not only can’t we divine it accurately the Fed itself doesn’t know as yet.
To take the numbers we’ve got today. The dollar carried on rising:
The U.S. Dollar index .DXY rose 0.9 percent and was on track for its fourth rise of the past five sessions, up 3.3 percent over that period. The euro fell 1.4 percent against the dollar.
Which is great. A rising dollar lessens inflationary pressure in the US. It makes imports cheaper, meaning that as long as it keeps rising, prices become lower. And it makes exports more expensive, meaning there will be fewer of them. That, in turn, reduces aggregate demand and thus lowers inflationary pressure. Sure, in a modern economy the price elasticity of imports and exports isn’t all that great but still, it does happen (although generally after a lag known as the J-Curve but that’s another matter). So, that rising dollar makes an interest rate less likely.
U.S. stocks traded sharply lower Tuesday, with the Dow Jones Industrial Average tumbling more than 200 points, following a drop in crude oil prices. Investors were also cautious after the U.S. dollar surged to multiyear highs against the euro and the Japanese yen, driven by speculation that the U.S. Federal Reserve could raise interest rates sooner than previously thought.
On of the reasons the dollar traded higher, reducing inflationary pressure and thus the need for an interest rate rise, was that people thought that the last set of numbers, the jobs ones from Friday, will lead to the Fed raising interest rates sooner.
This just isn’t an easy area in which to divine what is really happening. And, as I’ve said before, this is the problem that we all do have over this sort of policy. And it’s not just us: it’s the Federal Reserve and the Government (in their field of operations) as well that face this fog of uncertainty. We’ve got lots of information, none of the information we get is in real time. None of the pieces of information we do get are actually definitive. Piecing together those various pieces is difficult and there’s absolutely no guarantee at all that we’ll get it right. Nor, sadly, that the Fed or the government will.
This is why detailed macroeconomic demand management, as people tried to do in the 60s and 70s, really just doesn’t work. Sure, we do need to decide what the Fed funds rate should be and so on, but really, anything more detailed than that almost certainly fails given our information. Thankfully, no one actually does propose detailed demand management these days but we ought to keep this in mind for when any fool does pop up and propose it.
My latest book is “23 Things We Are Telling You About Capitalism” At Amazon or Amazon UK. A critical (highly critical) re-appraisal of Ha Joon Chang’s “23 Things They Don’t Tell You About Capitalism”.
