Does The Fed Really Care About Real Rates?

As expected, the Fed hiked by 25 basis points. My guess is that they are unlikely to move away from 25 basis points per meeting, at least until something changes. Some people are still trying to sell the story of a one-time 50 basis point hike, but I believe that accomplishes very little — unless they plan multiple 50 basis point hikes.

The interesting question is: does the Fed really care about real rates? Even with this hike, inflation rates will be rising for at least a little longer, so real rates are still getting more negative. If one took conventional models seriously, the economy is at increasing danger of running out of control. This implies a need for Volcker-esque hikes. Although that possibility excites the bond perma-bear camp, I have my doubts that the Fed will react that way. Which is not a vote of confidence in the importance of mathematical models in economics, which I have been told are very important.

This note is brief because I contracted COVID-19 (for the first time) last weekend. So far, it has only been the equivalent of a minor cold. My third vaccination was done in January, so that probably helped keep the effects mild. Since I will have other things to catch up on once I am back to speed, I expect a publishing pause. For what it’s worth, there’s been a lot of cases among my acquaintances in the past couple of weeks, whereas there were very few before. To the best of my knowledge, nobody is severely sick. So long as we do not need medical attention, we will not make it into official case statistics, making the case numbers not particularly useful. The only stats that appear to matter are hospitalizations.