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worstspotgain | 1 year ago
The question is not what's affected. It's how much monetary policy it takes to achieve the desired output and employment effect, and where is the employment effect. We want to stop increasing rates once the effect is achieved.
We raise rates because the economy is overheating. Too much money is chasing too few goods, raising prices. In response to the favorable prices, too many jobs are chasing too few workers, raising wages.
Rising prices and wages (without rising productivity) means inflation. We're at one edge of the Phillips curve [1] and need to move back to the middle.
> That may be a goal, but it isn't the goal.
The goal is actually to raise unemployment. That's what the "cooling the overheating economy" euphemism means. However, we don't have the tools to raise it evenly in all sectors. The only tool we have is the short term interest rate.
Luckily, it affects the long term rate, which affects demand for homes, new and existing. For (say) every 20 fewer homes sold, one realtor and one banker might go unemployed. But for every 20 fewer new homes built (say), 50 laborers might go unemployed. That's why the transmission is primarily through construction [2] [3]. The consumer durables sector (appliances) used to have a large multiplier too, but most of those manufacturing jobs have been automated or moved overseas.
> they wouldn't be lagging if the effects must have already happened
You can model the lag effects as geometric decays of the original impulse. You need a negative original effect (one impulse of high unemployment) that will then regress back to baseline (continued but fading unemployment.) We didn't have any impulse, hence no decay.
The only thing that could really go wrong is a resurgence of inflation if the cuts were too fast, but chances are we would have seen that already too.
> relative to where we would have been without intervention
The problem here is we were at too much output/employment. We had to get through that moment and fix the problem without overshooting in the opposite direction.
We couldn't do better, that's the whole point. It's not like there was potentially more output to be had. The actual problem is that output was too high. That's why there was inflation.
[1] https://en.wikipedia.org/wiki/Phillips_curve
[2] https://www.usnews.com/news/economy/articles/2022-12-20/new-...
[3] https://www.infracapfunds.com/post/why-the-us-is-unlikely-to...
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