By Edward Lambert
I have been saying for more than two years that the Fed should have raised the Fed rate earlier. Now it is too late, because the economy is over the top of the business cycle... or, as I would say, against the effective demand limit. They should have raised the Fed rate when effective demand was open and available to give momentum (my recent post on this).
So, I give you this video from Boom Bust. I direct you to the end of the show in the segment called Big Deal (the 21:30 minutes point). You will see across the bottom of the screen - Federal Reserve Tightening Too Late. They talk about why the Fed should have raised the Fed rate earlier. Will more economists end up realizing this?... I think so...
You might also watch the segment of the show with DiMartino Booth. She too has said the Fed waited too long.
Update: Why did the Fed wait too long? This, to me, is an interesting question. Paul Krugman is kind of upset that the Fed is raising rates now, and is unclear why. But ironically, the Fed may actually have been listening to Krugman and DeLong and others, causing them to hold off. But eventually, the Fed had to get on the normalization path. Yet, waiting until the top of the business cycle is kind of not smart. They did not know that the business cycle was reaching its top fast... but I did, with my effective demand calculation...
They overestimated the output gap. While I saw less actual potential, because I re-calibrated potential lower with a drop in labor share.
So, what are you going do?