"just cut the money supply and take back some repos and coupon passes."
Raising rates cuts the demand for credit, and targets especially those high ticket sectors which have benefited in the extremely low rates, ie mortgage/auto loans. That is the theory anyway. I don't know how you can cut the money supply without a resultant increase in rates. Get interest rates high enough, it kills everything, especially if there is no wage inflation.
I remember the middle 70s when OPEC drove up the price of oil. I well remember the panic line-ups at the pumps, the numerous articles about wealthy Arabs going on buying binges, and I especially remember the inflation which set in. It was the inflation in prices and wages which eventually brought the price of oil back in line relatively, but it took a few years. In the meantime, everything else had caught up. I also remember the real estate explosion at that time, and wondered how anyone could afford housing then. In Canada here, we had national price and wage controls. In retrospect however, due to inflation, those once high prices are now piddly compared to today.
Seems to me like the FED would like to repeat those events by causing inflation. If so however, the problem is as you have correctly pointed out, wages, which show no signs of inflation.
Russ and others have pointed out that regardless of what the FED may wish, they may not in the end be in total control of interest rates. Not all fiscal problems can be solved by monetary solutions. The government needs to get its fiscal house in order. All the FED can do is to print money (provide credit) and cover the fiscal deficits. The future of interest rates are increasingly in foreign hands. |
