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pattydo t1_it83rus wrote

Reply to comment by -casper- in [OC] Inflation rate and nominal interest rate by giteam

Yeah, when all you have is a hammer, everything looks like a nail.

>Another side to this is that they want to dampen the labor market which helps reduce wage-spiral inflation a bit

But like Powell has said (and is backed up), unemployment and inflation no longer have a strong relationship.

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-casper- t1_it8535w wrote

Hmm, but with inflation that leads to higher interest rates, higher interest rates means cost of borrowing becomes more expensive, this leads to less capital raising by companies (leading to less ventures and reduction in hiring) and for companies on the fringe, they won’t be able to raise capital to maintain (potentially) headcount / opex.

We may be at a weird time where with covid and baby boomers retiring, the surplus of jobs to job seekers can counteract this (which may be what Powell is referring to) but the above should hold — unless the vast majority of companies in the US right now are well capitalized, which seems unlikely

I could be missing something. Higher rates to cost of borrowing reductions may definitely lag a bit

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pattydo t1_it85qrw wrote

Interest rates absolutely impact employment numbers. It's that employment numbers doesn't have much of an impact on inflation. It makes sense when like, 50% of inflation is caused by corporate profits.

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-casper- t1_it87err wrote

It may not be directly related to employment, but if consumer sentiment goes down (which is definitely related to employment), and people think storms are ahead, they probably start to reduce spending (especially on things like travel, etc) which curbs demand side and should bring down prices

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pattydo t1_it87rzq wrote

That's the theory. It's just not really happening anymore for many reasons (market concentration likely one of the main ones)

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-casper- t1_it8892i wrote

Hmm that’s an interesting/good point

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Orangeflea215 t1_it9fmqf wrote

Is there any evidence that it's bidirectional? Powell made the claims you've referenced with regard to open market operations/low interest rates/low unemployment not resulting in increased inflation over the past decade, but I don't see any reason that that would necessarily imply that raising interest rates/high unemployment wouldn't still exert deflationary pressure.

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pattydo t1_itkwvlc wrote

The link that is broken is unemployment and inflation, and yes there's evidence for that. That's not to say raising interest rates can't fix inflation. It's that, IMO, it would do very little for this inflation.

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Orangeflea215 t1_itlde56 wrote

Yes, the Phillips curve, I’m aware. I’m not sure that you’ve understood my question. My point was that interest rates have been kept near zero (and unemployment correspondingly low) for well over decade with little deviation, so it’s unlikely there’s any empirical evidence that an increase in unemployment won’t still have an impact on the inflation rate (because aside from the year or so post-covid, there hasn’t really been one). So to rephrase, sure, there’s evidence that low unemployment rates aren’t driving inflation as you would traditionally expect, but is there any evidence that an increase in unemployment isn’t still linked to a decrease in the inflation rate?

Of course, that’s all irrespective of the fact that the Phillips curve is an oversimplification and changes in the labor market are hardly the only means by which a change in the interest rate might mediate inflation. It’s not like open market operations don’t affect the money supply.

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pattydo t1_itlmi3x wrote

Wouldn't a low interest rate with changing unemployment be a pretty decent indicator that the link isn't very strong?

>so it’s unlikely there’s any empirical evidence that an increase in unemployment won’t still have an impact on the inflation rate

It's not no impact, it's just a lot less of one than in the past.

>but is there any evidence that an increase in unemployment isn’t still linked to a decrease in the inflation rate

Yes. When unemployment spiked in ~2010 but inflation was at 1%

There's just so so much more monetary policy and economic forces that impact inflation these days.

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Orangeflea215 t1_itloxpl wrote

>Wouldn't a low interest rate with changing unemployment be a pretty decent indicator that the link isn't very strong?

You still haven’t understood my argument.

> Yes. When unemployment spiked in ~2010 but inflation was at 1%

I’m not sure what you meant to say but that’s perfectly in line with what the Phillips curve would suggest.

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