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Comment by JumpCrisscross | Hacker News Reader

> He's expecting the act of raising interest rates to increase unemployment to 4.4%

> He directly says he's waiting to see softening of the labor market before stopping the rate hikes

Yes, because we don’t want to ruin the labor market. Right now, rates can be raised without spiking unemployment. The Fed is trying to estimate when that stops happening.

A clear signal that the limit has been reached is the labor market actually softening. That doesn’t mean the Fed is trying to raise unemployment. It’s trying to lower inflation, and thinks unemployment may rise as a result of that, though to date it has not.

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No, that's not what Powell is saying. Read this quote again:

> So I will answer—I will answer your question directly, but I want to start here today by saying that my main message has not changed at all since Jackson Hole. The FOMC is strongly resolved to bring inflation down to 2 percent, and we will keep at it until the job is done. So the way we’re thinking about this is, the overarching focus of the Committee is getting inflation back down to 2 percent. To accomplish that, we think we’ll need to do two things, in particular: to achieve a period of growth below trend; and also some softening in labor market conditions to foster a better balance between demand and supply in the labor market.

Powell says (paraphrasing slightly): "In order to get inflation under 2%, we need to do two things. 1. achieve a period of low growth, and 2. soften the labor market." Low growth and higher unemployment aren't simply side-effects of Powell's policy. These two things are explicitly stated goals.

No. That quote still doesn't support your assertion. It clearly says that the actual goal is to control inflation.

Would it be correct to say the Fed's goal is to lower economic growth? I don't think so. It's trying to lower inflation and predicting negative, possibly necessary, side effects. But if you read that quote as saying the Fed is trying to raise unemployment, then it's also saying the Fed is trying to lower growth, which is an odd reading to say the least.

I think we're arguing over the definition of goal and side-effect.

Let's say I have a goal of running a marathon, so I decide to start jogging every day. Is my daily jogging a side-effect of my goal to run a marathon? I wouldn't say so. Rather, jogging every day is an explicit course I've set out on with the hopes of achieving my main goal. Daily jogging is a sub-goal of the main goal, if you will. This logic can be applied to the Fed. The main goal is to lower inflation, and the chosen course of action (i.e. the sub goals) are to lower economic growth and to increase unemployment.

A side-effect would be something akin to knee pain. I can't jog without hurting my knees, but having pain in my knees isn't something I explicitly set out to do.

A side-effect of Fed policy would be something like the gilt crises in the UK. Higher US rates increase yields on UK bonds indirectly. But that isn't something the Fed is actively setting out to do.

> Let's say I have a goal of running a marathon, so I decide to start jogging every day. Is my daily jogging a side-effect of my goal to run a marathon?

You can't run a marathon without your daily jogs. Inflation can be lowered without spiking unemployment. It's unlikely. Hence the Fed's messaging. But until recently the Fed forecasted a soft landing, i.e. growth and low unemployment amidst rising rates and falling inflation.

Better analogy: engine temperature. You're driving and keeping an eye on the thermometer. You see the temperature is low and so feel comfortable accelerating. The goal is getting to your destination faster. The low temperature lets you accelerate, which in turn raises the temperature. But raising the engine temperature wasn't the point. It reverses cause and effect to say your goal was to raise engine temperature. It wasn't. Engine temperature was simply a limiting factor you were paying attention to.

Using analogies is always dangerous because they're never going to be a perfect fit. But the difference between your engine analogy and the federal reserve's actions is that anemic economic growth and high unemployment is not a side effect. In your engine analogy, adding more gas and air into the engine increases the amount combustion. It's the combustion that increases speed, so in a sense increase combustion is a goal. Released heat is just a by product of the reaction. In the economy, the amount of economic activity and the amount of available labor are what drive prices, so these things are the combustion in the piston, not a byproduct.

> amount of economic activity and the amount of available labor are what drive prices

The relationship is sufficiently complex to permit e.g. falling unemployment, falling (not negative) wage growth, falling (including negative) growth and falling inflation. It's not a deterministic system.

> in a sense increase combustion is a goal

No, it's not, because the goal--reaching the destination quickly--would be accomplished equally well in an electric car with no combustion. That's the difference between a goal and an effect.

Look, I agree that theoretically it’s possible to lower inflation while keeping unemployment low. But the Fed is looking for a causal effect. They want higher unemployment because that will balance the labor supply and reduce wage growth. That’s what the Fed has said. The fact that they’re looking for a causal effect in raising unemployment means the engine analogy is not valid. There is no causal relationship between engine temperature and speed.

I think you’re falling for the no true Scotsman fallacy. We started this conversation talking about whether or not the Fed’s goal is higher unemployment. I presented an argument, in the Fed’s own words, that they plan on lowering inflation by weakening the labor pool. And your response is “that’s not really a goal.” I disagree and, and I don’t see a productive way forward for this conversation. At the very least, you should accept that this is a valid interpretation of the Fed’s own words, and not just some conspiracy theory being peddled.

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