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« Buy List Earnings | Main | Banking Index +22% » July 16, 2008 Is it Time to Raise Rates?Megan McArdle says yes. Today’s inflation report shows that consumer prices rose by 1.1% last month which is the largest jump in 26 years. For the last 12 months, the headline rate has been 5.02% while the core rate is 2.41%. With the Fed at 2%, this means that real interest rates are still negative. The market isn’t expecting the Fed to raise rates anytime soon. According to the Cleveland Fed, the futures market is pretty much convinced (over 80%) that the Fed will hold steady at its August meeting. Going by Professor Mankiw’s Fed Funds Rate equation, the Fed is way too loose. His equations is: Federal funds rate = 8.5 + 1.4 (Core inflation - Unemployment) Let’s plug in the numbers the numbers from June: Federal funds rate = 8.5 + 1.4 (2.41 – 5.50) That comes to a rate of 4.174% which is more than double where the Fed is. Posted by edelfenbein at July 16, 2008 1:19 PM |
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