Changes in prices and interest rates and expectations are self-reinforcing. Higher prices and interest rates increase demand and demand for money relative to supply and money supply which further reinforces higher prices and interest rates and vice versa.
Similarly, changes in prices and interest rate expectations are also self-reinforcing, lower price expectations delay demand or increase supply which reinforces low prices and interest rates, and demand would go down relative to supply, the opposite is true, too.
Therefore, our target is NAIRU, an employment level consistent with stable inflation of 2 or 4%, though changes in unemployment and prices or inflation are again self-reinforcing... Higher prices are enough to control demand, if a limit is prescribed, and rate hikes by the central banks would reduce the money supply and supply and further reinforce demand, prices, and rate hikes...
Instead of signaling agents, the Fed shall directly communicate to act in the way inflation or prices are controlled, to increase demand or not, or lower demand for stable interest rates and borrowing costs and credit. The Fed shall make people economically conscious of how to deal with prices and interest rates and behave in the marketplace...
Blue-collar workers' employment and wages hurt more because of the impermanent nature of jobs and their income is fixed in the short run.
The inflation we are seeing is the product of inflation we have in the base periods, base years are the determinant of the current percentage of inflation, how our past had been, decides our future inflation percentage. Inflation percentages are not directly comparable because the base year is changing every quarter and year.
GDP at constant prices has recovered from the covid trough completely though and we need stable real interest rates or natural real rates when near to full employment at which there is neither inflation nor disinflation.
1-1.25% real rates are quite good for savings to reduce spending and lower inflation. Stability everywhere is what we want, interest rate stability is akin to financial stability and stability of expectations.
Biden's spending provided floor to demand and growth and increased inflation during a disrupted supply which increased inflation and expectations and actual inflation on a low base.
The US economy has bypassed one of the major reasons for inflation expectations, now it has a sufficient buffer for OIL prices and the other is labor-force which is still there and the labor market is tight that is due to which we have actually is wage-inflation expectations, possible cause of stagnation and interest rate hike expectations even in a lower inflation expectation environment.
Lower exports due to the strong dollar, have also increased the supply to the domestic market and contained inflation due to uncertainties like Russian war engagement. The US doesn't need foreign exchange and the economy is close to full employment. Lower import prices have contributed to a disinflationary economy and higher real wages which we want.
If we are at full employment and prices are going down that natural rate theory suggests that we need to stabilize prices while stabilizing interest rates. Lower price expectations could be self-reinforcing and could increase real rates.
Low prices and the coupled expectations and conditions point to delayed spending, ahead and rate cut expectations...
It is now common for people that price expectations are self-fulfilling because they are factored into wage expectations and cost and prices, again, which further reinforces prices and is self-feeding.
Rate hike expectations have led to lower price expectations which are also significant, lower price expectations are also self-reinforcing.
Rate hikes and EXPECTATIONS and Fed's credibility are important for lower price expectations and delay in demand and increase in supply, at full employment, imports too, due to a strong dollar.
The developed economies have strong currencies and the developing and lower economies' currencies are weak which is self-fulfilling. In an attempt to reduce the trade deficit developing countries use depreciation to increase exports and this depreciation expectation makes consumers delay demand for weak countries and/or currencies and increase demand for developed countries and currencies. Which is self-reinforcing...
INDIA may commit to a stable currency in order to stabilize export demand and demand for currency and gradually strong currency expectations to internationalize its currency... Its convertibility and store of value credibility would depend upon its stability and responsible central bank. Chinese currency instability has made it an unviable option...
Dollars demand depends upon the things the US sells/exports and it accepts only dollars. If that is the right model everybody shall buy, the American dollar policy, and follow the same policy, if that is right. Other countries have made dollar, dollar.
It seems just that if a country exports higher it shall accept its own currency like the US, any government has to spend that money largely domestically to provide public goods. But it has different values for different countries and that is a partiality.
Money is a standard that is changing with other country exchange. For the poor it is expensive and for the rich it is dear. This is the World we live in.
Before the advent of the Internet, the collective consciousness never proved so speculative. When people get a piece of information they act if have an opportunity. Information is flowing freely despite maps and differences. Prior to it, the Fed maintained its secrecy, but now people try to get ahead of the Fed Policy... It has made expectations or collective expectations and actions self-fulfilling and self-reinforcing...
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