From Bloomberg:
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 the central bank starts cutting.
“A lot of what’s going on with inflation today can be linked very closely with the level of interest rates,” Manley said. “You slice and dice inflation and whether you’re looking at the headline number, whether you’re looking at the core number, you’re removing the goods equation — so much of it has to do with the rate environment.”
Apparently, Dr. Stephanie Kelton is an adherent of this view.
From NYT August 25, 1956:
Representative Wright Patman charged today that the increase in interest rates by the Federal Reserve System in an effort to curb inflation amounted to “trying to put out a fire by pouring gasoline on it.”
If you want to model this, take a look at Driskill and Sheffrin (JPE, 1985).
Marvin J. Barth III and Valerie A. Ramey
FEDERAL RESERVE BOARD OF GOVERNORS; AND UNIVERSITY OF CALIFORNIA, SAN DIEGO, AND NATIONAL BUREAU OF ECONOMIC RESEARCH
The Cost Channel of Monetary Transmission
https://www.nber.org/system/files/chapters/c11066/c11066.pdf#:~:text=One%20version%20of%20this%20view%2C%20which%20ignores%20long-,inflation%20was%20like%20%22throwing%20gasoline%20on%20fire%22%20%281970%29.
A 2002 discussion.
Patman had a long and distinguished Congressional career which included this:
The Patman Committee investigated the hundred dollar bills found on the Watergate “plumbers” upon their arrest, suspecting they could directly link them to CREEP, the president’s re-election committee. The Patman Committee’s 1972 investigation was stymied by pressure from the White House, in part aided by Congressman Gerald R. Ford.
More on Ford’s role in Watergate:
The Pardon Nixon, Ford, Haig, and the transfer of power.By Seymour M. Hersh
https://www.theatlantic.com/magazine/archive/1983/08/the-pardon/305571/
There is a numbers problem with Manley’s contention that high interest rates are now causing inflation, if we take him to mean inflation in the aggregate. That because housing costs aren’t contributing as much to inflation as core services, ex-housing:
https://www.stlouisfed.org/on-the-economy/2023/oct/inflation-way-out-here-stay
Housing accounts for 16% of the PCE basket and contributed 1.1% (annualized) to inflation in 2023 through August. Core services ex-housing is 50% and contributed 2.0%. Core goods account for 22% and contributed 0.2%
Assumung (as ine should) that high interest rates work to reduce core-service-ex-housing inflation and core-goods inflation, housing simply isn’t big enough to do what Manley says. Housing inflation would have to fall to zero and all other core inflation would have to be unaffected by lower rates in order for Manley’s scheme to work.
Now, is Manley right about housing prices declining meaningfully in response to lower rates? Manley, from the BBG article:
“If people could afford to buy homes, they wouldn’t need to rent as much, and rents could stabilize.”
This theory assumes either that unoccupied homes are being held off the market, or that lower rates would lead to significantly more construction of homes for purchase. (Manley’s theory ignores the possibility that a lower rate of return in the fixed-income market would induce a lower rate of return in the rental market – a glaring omission, but whatever. . .)
One little point of potential confusion – the fact that used home sales are quite slow these days doesn’t contribute to the housing shortage. That’s sometimes mentioned as a contributing factor, but that confuses turnover with supply.
Here’s the problem with the “vacant units” theory:
https://fred.stlouisfed.org/series/EVACANTUSQ176N#
Other than a sharp drop during the Covid recession, vacancies are around their lowest level in twenty years. No help for Manley’s theory from that quarter.
So for Manley to be right, there has to be a shortage of housing production, attributable to interest rates. Here, we have a better match to the data, but there is still plenty of room for doubt:
https://fred.stlouisfed.org/graph/?g=1jWNW
New housing units under construction remain at a record level. Starts, on the other hand, have slowed. Starts slowed at the same time that the Fed began hiking rates and at the same time that units under construction reached their recent record-high plateau. Coincidence? Theory suggests interst rates are the culprit.
Still, supply constraimay paly a role in the slowdown of starts. The peak in unfinished units is widely understood to be the result of capacity constraints. It could be that builders have simply cut back on starts until the glut of unfinished homes is reduced. We know from the Fed’s senior lending officer survey that most credit standards have tightened and that demand for residential construction loans has softened. Reduced loan demand could reflect the glut, or could reflect high interest costs; can’t tell from the SLOOS report.
Anyhow, what we know is that labor and material constraints are limiting the supply of new homes. We know that the number of unoccupied homes is low, so can’t help with supply. We have reason to suspect that high interest rates have slowed housing starts, but increased starts would not flow entirely into new homes for sale in the near term because some could not be readily completed.
It has recently been reported that the average price of a home has reached $1 million in 500 U.S. municipalities (go find your own link). That’s not a reflection of interest rates, except perhaps that the number would be higher if rates were lower. We have a structural supply problem, the result of local policies and business decisions. Much as I think the Fed is creating is a poor balance of risks by leaving rates high, the numbers say Manley’s broad inflation argument doesn’t hold up, and I have doubts about his narrow housing-price argument.
Really nice breakdown, but a heavy lot to think about and ponder. As always from you Sir. I haven’t read what McBride said about this yet, his thoughts must be enlightening if we can get him to discuss Patman’s thoughts.
My understanding is that when Pacman raised this potential effect, government bond rates had increased a bit but were still below 4%. Dr. Chinn references a 1985 paper on modeling while I was able to find something from 2002 that went into the empirical issues. But we probably need an update and you are starting down the right track.
Now mortgage rates were insanely high back around 1981 but even a 7% mortgage rate is not that crazy by historical standards.
@ pgl
I can’t find a FREE version of the Patman paper. You told me I am supposedly good at hunting these things/papers down. You can outdo me here, I can’t find the damned thing. If you know a way I can access a free version of Patman’s ’85 paper I would be extremely grateful.
Menzie, you’re kinda used to me being obtuse sometimes. I can’t tell if you are mocking this a little bit, or if you are saying we should “stay open” to this view?? The Moses that thinks he “knows” you says you are mocking this as ridiculous. But the “take everything in” Moses is saying you might be open to segments of Patman’s view. Can you humor me and “spell out” your feelings on this???~~assuming it doesn’t damage Madison WU classroom discussion.
Moses, until Menzie replies, I’ll kibitz. This is from Menzie’s Driskill and Sheffrin link:
“We find that the presence of interest costs does affect the stabilization process and can make the tradeoffs between output and price variability less favorable.”
In economics, there’s usually an “on the other hand…” Interest rate increases don’t work exclusively to reduce inflation, but mostly. The question, then, is “What’s the overall balance?”
I think the math says Manley is wrong. Others may slice the baloney differently.
“kibitz”. not like Netanya no -one. But like True kind and compassionate Jews. Love you guys,
—-from a loser/jerk German, Anonymous
See also David Andolfatto.
Your coment to Andolfatto makes sense. His model sounds too clever. It is unclear whether he is assuming transitory interest-rate effects or has evidence. Absent evidence, simply declaring his view to be counter-intuitive doesn’t cut it.
Good.
I think at high in recent memory safe interest rates some savers may shift to more spending, wealth effect of sorts.
enough about patman what about robin?
Well the Robinson-Patman act was an important piece of legislation.
“Was”, yes. Hadn’t been applied in some time, but still on the books. Now, members of Congress, at the behest of grocers and wholesalers, have asked the FTC to enforce it:
https://time.com/6307359/government-ftc-walmart-prices/
Fonthe curious, here’s the FTC’s page on Robinson-Patman:
https://www.ftc.gov/advice-guidance/competition-guidance/guide-antitrust-laws/price-discrimination-robinson-patman-violations
The Time discussion provides a link to this interesting discussion:
https://farmaction.us/2023/06/08/retail-consolidation-crisis-across-the-food-chain/
Retail consolidation is profitable because retailers like Wal-Mart have significant monopsony power. Now Princeton Stupid Steve has told us many times monopsony power cannot exist – but then he is wrong as usual.
The Journal of Law and Economics has lots of discussions of the economic effects of the Robinson-Patman Act.
@ Not Trampis
The pun so bad it was good. “Patman and Robin” were AMERICAN-Jew inventions. Thanks for your admiration. We’ll remember this extreme cultural flattery when you apply for your American citizenship.
: )