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Should we make fun of JP Morgan?



Should we make fun of JP Morgan?

JP Morgan is one of America’s leading investment banks. So what should we make of the following statement?

The Federal Reserve has raised interest rates the most in decades to reduce inflation. High borrowing costs should slow down the economy to prevent consumer prices from rising too quickly.

But JPMorgan Chase’s Jack Manley argues that the Fed’s current interest rate range of 5.25% to 5.5% is effectively inflationary right now, and prices won’t stabilize further until the central bank starts cutting spending. . . .

Manley’s idea is provocative. It also shows how little agreement there is on how to understand the economic cycle we are in.

The same Bloomberg piece suggests that most conventional economists have a very different view:

This is pretty radical thinking, and goes against a lot of economic thinking. (When Kathy Bostjancic of Nationwide Mutual Insurance was asked for her thoughts on this issue more broadly, she flatly disagreed.)

I find this all quite depressing (although you can see the update at the end of the post). Macroeconomists still stumble around and make basic economic mistakes – in this case, reasoning from a price change. Is it actually possible that in 2024 we’ll still be debating whether higher interest rates are inflationary or deflationary (or don’t matter either way)?

This applies to making fun of the JP Morgan analyst: there is no point in talking about 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.

This goes for not making fun of the JP Morgan analyst: conventional economists often make exactly the same mistake (reasoning from a price change), but in the opposite direction. They assume that higher interest rates are tight and will lead to lower inflation. Again, it depends why interest rates rose. Thus, the sharp increase in interest rates in 2022 mainly reflected the Fisher and income effects, rather than the liquidity effect resulting from the tighter money supply.

Today’s disappointing inflation report is another reminder that we have not yet achieved a soft landing, despite all the premature “mission accomplished” declarations we have seen in the financial press over the past year. High interest rates did not cause the recent bout of high inflation, but they did not solve the problem either.

Inflation depends on monetary policynot the interest.

Update: I listened to the video and his comments are more ambiguous than I initially thought based on the Bloomberg piece. Manley doesn’t say interest rates are falling cause lower inflation, he says we should not expect lower inflation until we are in a period of lower interest rates