JP Morgan is one of America’s most important investment banks. So what should we make of the following claim?
The Federal Reserve raised rates the most in decades to bring down inflation. High borrowing costs are supposed to put the brakes on the economy to keep consumer prices from rising too quickly.
But Jack Manley at JPMorgan Chase argues that the Fed’s current rate range of 5.25% to 5.5% are actually inflationary at this point, and that prices won’t stabilize more until the central bank starts cutting. . . .
Manley’s idea is a provocative one. It also shows how little agreement there is on how to understand the economic cycle we’re in.
The same Bloomberg piece suggests that most conventional economists have a very different view:
This is pretty radical thinking, and flies in the face of a lot of economic thought. (When asked her take on this issue more broadly, Nationwide Mutual Insurance’s Kathy Bostjancic flatly disagreed with the thesis.)
I find all of this to be quite depressing (although see update at the end of the post.) Macroeconomists are still stumbling around, engaging in elementary economic errors—in this case, reasoning from a price change. Is it actually possible that in 2024 we are still debating whether higher interest rates are inflationary or deflationary (or don’t matter either way)?
Here’s the case for making fun of JP Morgan’s analyst: It makes no sense to speak of the effect of interest rates on inflation. Interest rates change for many reasons. Some of those reasons lead to higher inflation, and some of those reasons lead to lower inflation.
Here’s the case for not making fun of the JP Morgan analyst: Conventional economists often make the exact same error (reasoning from a price change), but in the opposite direction. They assume that higher rates are tight money, and will lead to lower inflation. Again, it depends on why interest rates increased. Thus the sharp rise in interest rates during 2022 mostly reflected the Fisher and income effects, not the liquidity effect resulting from tighter money.
Today’s disappointing inflation report is another reminder that we have not yet achieved a soft landing, despite all the premature “mission accomplished” statements we’ve seen over the past year in the financial press. High interest rates did not cause the recent bout of high inflation, but they also did not solve the problem.
Inflation depends on monetary policy, not interest rates.
Update: I listened to the video, and his comments are more ambiguous than I first thought based on the Bloomberg piece. Manley is not saying that lower interest rates cause lower inflation, he’s saying we should not expect lower inflation until we are in a period of lower interest rates
