Tightening in the US...

Balance-sheet reduction coupled with gradual rate hikes in the US are likely to increase the market rates more than the policy rates... The Fed expanded the balance sheets in order to improve rate cut transmissions, long-run and short-run interest rates, both... Actually it is the money-supply that decides the market rates and the policy rates work as a guidance, therefore market rates are generally higher than the policy rates and, as been said before, money-supply improves interest rate transmissions... Lower money supply with gradual rate hikes and higher market rates are likely to lower spending and growth and expectations... The Fed itself is putting brakes on expansion even when there is scope to achieve a higher potential growth rate... It should tie its decision with higher growth rate and overheating... So far there is no such condition... The Fed is trying to act in the hindsight or trying to be proactive when overheating would itself give it chance to control inflation and build capacity to act when the next recession hits... The Fed by increasing rates is itself bracing for lower demand and growth which is already low given the potential... Why the Fed wants to lower demand and growth when inflation is still contained and there is space to improve upon the growth rate? The Fed should wait for clear signs of overheating before lowering demand, inflation and growth and expectations...




Why the Fed is tightening when inflation is still low and there is less pressure on nominal and real wages (?) in the face of the inflation target, which could amount to lower demand and growth and lower inflation expectations... But, it is not as straight as it seems... The Fed could stabilize when we are close to the inflation-target by neutralizing all of its levers... US' population growth rate is over 9% per ten year which after accounting for the natural or structural employment at 5% gives a potential growth rate of 4% that means the US has to grow 4% on an average or mean basis to achieve full-employment and growth with a neutral stance... Growth rate is still tepid... Fed is expecting inflation when there is no inflation... The Fed itself is creating and uncreating inflation and deflation and expectations which often work in the opposite directions, lower inflation increases demand and inflation expectations... Low and stable inflation means we are close the natural or neutral real rate of interest which should be continued...

There have been two major reasons why prices are not increasing despite full-employment, number one is lower population growth in the developed economies and the second one is lower crude oil prices... Now, the US has become a net producer instead of a net importer in the last decade... Technological progress or innovation or productivity has slowed down except the shale-oil and investment in the renewable energy... But, lower real wages despite increased productivity in the developed economies has also held-off the demand and growth rate low... In a bid to increase exports through inflation and depreciation the economies have cut down on doemstic real wages and demand... Even though the economy achieved full employment and nominal wages increased but that is due to inflation... When inflation increased it increased nominal wages, but kept real wages low which is likely to reduce demand and inflation that is why the developing economies like Japan are going through a period of low inflation... The same might also be true for the US...