Stagflation trap says… yes hello

I think the consensus after the 70's is that you have to deal with inflation first so...up.

If the reason for the increase is a tax (tariff), no rate increase will help the situation. The (weak) logic of increased rates is to reduce demand. The tax increase should do that all on its own.

The issue is that there is a risk of inflation becoming imbedded and continuing to go up after the initial increase (similar to the what oil prices led to in the 70's).

Hard to say that interest rates are really what dampens inflation. Inflation dampens inflation if you're not pouring money in the other end. Why people are so convinced that rates drive inflation I don't think I'll ever understand.

I think the "if you are not pouring money in the other end" answers your question? Lowering interest rates is pouring money in.

Also if the tariffs remain in place there will be a lot of economic restructuring which would likely meant the structural unemployment rate would go up. An interest rate that would push it below structural rate would lead to inflation. The fed will probably need to raise to avoid that.

Yeah I also think people forget that a Volcker shock is hugely incompatible with the current admins policy goals. Volcker’s 15-18 percent rates killed inflation but also killed a ton of manufacturing concerns who could no longer finance repairs and upgrades. Mass industrial unemployment followed.

To be clear, raising interest rates would almost certainly raise unemployment quite a bit for a time, but the alternative would be having high imbedded inflation. The Fed (assuming it remains independent) would take the former over the latter.

But my point is that the specific kind of jobs and economy they are trying to create is more incompatible with the solution that “worked” in the 80s It’s a lot easier to work on tight margins in the short term moving to the service sector than if you need physical infrastructure to function at all.

Ok but that's not something that's in the Fed's purvey. Their only goal is to set the interest rate at a point that will have the lowest unemployment without causing inflation.

Yep.