The Fed needs to lower rates because Trump told them to and will launch a global trade war if they don't listen to him, it is this kind of logical thinking and communication that we need from our dear leader in these troubled times !
Interbank demand deposits at the Federal Reserve Banks have fallen by 331449 B dollars since July 3rd 2025. But that's the problem with an ample reserve's framework. Reserves aren't scarce. Reserves aren't binding.
Dr. Scott Sumner says, "the monetary base is the primary policy lever for achieving nominal GDP targets".
Aren't you going to increase the transaction's velocity of money by implementing a reverse operation twist?
Reading posts by Professor Cochrane (a.k.a. The Grumpy Economist) is lighting a fire under my plan to study macroeconomics again (after decades of brain rot). I'm really bothered by inflation and want to know what causes it.
"If Congress sees the lower interest costs and ramps up spending, the party is over."
Forgive me. I am primitive & can not see how or where in the next decade Congress, regardless of party affiliation or theoretical basis, will not ramp up spending. It goes to incentive. We see this inclination in the profession of faith, that all we have to do is juice growth, and the debt/GDP will decline by a few points at which point all the little animals of the forest will be happy, and the band plays on. Any perceived slack in the system gets funded & over leveraged. Meanwhile the derivative form of debt, unfunded liabilities remains hidden & continues its robust growth.
We're watching the pre-game show for the end of that inflation party.
The analyses remind me of weather and climate models—useful for understanding complex systems, but limited in their ability to prescribe reliable long-term solutions. Perhaps the wiser course is not to continually try to control such systems, but to build resilience and prepare for the inevitable storms.
John, thank you for the follow-up. The pre-announcement route is elegant in the model, but the real binding constraint remains the same one you identified in the first post: the credibility and duration of the lower-rate path given the complete fiscal trajectory (including debt service). I explore this at greater length—drawing on Friedman’s 1968 warning about the impossibility of pegging rates for long when fiscal policy is inconsistent, and on the recent Argentine experience as an empirical illustration of the mechanism (not as a recommendation of repression)—here:
The Argentine case shows the channel can work when fiscal and monetary policy are tightly coordinated, but it also underlines that long-run sustainability is still an open question. Distant forward guidance is unlikely to solve the credibility problem if the policymakers themselves (including those you mention) are skeptical of binding commitments beyond a short horizon.
I am not an economist, but the idea that lowering rates will lower inflation in the long run is counter-intuitive. Are you sure that lower inflation is an effect of lower rates, rather than a cause?
Although on the surface it might appear to be otherwise, I think the lower long-run inflation rate in the model comes from the lower inflation causing the lower interest rates in the distant future. As long as you have anything approaching a reasonable definition of expected inflation in the model, the only way a lower interest rate can be maintained is if the rate of inflation goes down. By including a Fisher equation and a reasonable manner in which expected inflation is determined, the model constrains the inflation rate to be lower in the long run.
I read these last two posts with interest because they were counterintuitive. Ending long-term debt can be deflationary? Thank you for writing them because it causes learning and thinking.
I have some questions. They may seem stupid, and I am sorry if they are. I was an interest rate trader, not a theoretical macroeconomist.
Does the model assume that the market will accept the notional amount of debt that would have to be auctioned in the STIR market vs. the longer-term market?
Is there a difference in the elasticity of demand relative to the expiration of the instrument? Are five year notes more in demand than ten year notes vs 30 year? If the elasticity is rigid, wouldn't cancelling long-term debt and going short-term see a corresponding increase in the short-term interest rate?
What happens when debt has to be rolled over?
My compadres in the interest rate world always thought when interest rates were at 0%, the US should have auctioned off 100 year bonds and rolled the debt to very long term, cheapening the cost of paying the deficit off. That's why this post is very interesting to me because it prices in expectations. If debt is short term, the country has to pay it, or roll it over.
From the updated quote on the last post: “raising rates without any commitment from the Treasury to restrain deficits cannot resolve anything”
Keep your exact same model, but then add a line for total change in annual interest payments on a single bp change in rates. Under the longer term debt model there may be an immediate increase in government exposure due to higher short term inflation, but with the short term debt model in the long run when you have shifted to the short time debt regime the exposure to any rate increase is MUCH higher. Government exposure to shocks, either crises or fiscal ie political choices, increases. The price of the debt can go down with short term debt because risk has shifted from bondholders to the government! Here’s a model: switching to only short term debt is like writing a loaded gun into the first act of a play.
I think they should raise interest rates. People don't need to spend more, they need to save and inflation is the name of the game, keeping rates lower, isn't it!! Banks control it all and the Feds only " make a suggestion" which banks ignore... Congress will never be a help.
The Fed needs to lower rates because Trump told them to and will launch a global trade war if they don't listen to him, it is this kind of logical thinking and communication that we need from our dear leader in these troubled times !
Interbank demand deposits at the Federal Reserve Banks have fallen by 331449 B dollars since July 3rd 2025. But that's the problem with an ample reserve's framework. Reserves aren't scarce. Reserves aren't binding.
Dr. Scott Sumner says, "the monetary base is the primary policy lever for achieving nominal GDP targets".
Aren't you going to increase the transaction's velocity of money by implementing a reverse operation twist?
Reading posts by Professor Cochrane (a.k.a. The Grumpy Economist) is lighting a fire under my plan to study macroeconomics again (after decades of brain rot). I'm really bothered by inflation and want to know what causes it.
"If Congress sees the lower interest costs and ramps up spending, the party is over."
Forgive me. I am primitive & can not see how or where in the next decade Congress, regardless of party affiliation or theoretical basis, will not ramp up spending. It goes to incentive. We see this inclination in the profession of faith, that all we have to do is juice growth, and the debt/GDP will decline by a few points at which point all the little animals of the forest will be happy, and the band plays on. Any perceived slack in the system gets funded & over leveraged. Meanwhile the derivative form of debt, unfunded liabilities remains hidden & continues its robust growth.
We're watching the pre-game show for the end of that inflation party.
'We're a festival of conviviality.'
https://youtube.com/watch?v=YvUbbYX9BMs
The analyses remind me of weather and climate models—useful for understanding complex systems, but limited in their ability to prescribe reliable long-term solutions. Perhaps the wiser course is not to continually try to control such systems, but to build resilience and prepare for the inevitable storms.
John, thank you for the follow-up. The pre-announcement route is elegant in the model, but the real binding constraint remains the same one you identified in the first post: the credibility and duration of the lower-rate path given the complete fiscal trajectory (including debt service). I explore this at greater length—drawing on Friedman’s 1968 warning about the impossibility of pegging rates for long when fiscal policy is inconsistent, and on the recent Argentine experience as an empirical illustration of the mechanism (not as a recommendation of repression)—here:
https://ggesualdo.blogspot.com/2026/09/the-sustainability-of-interest-rate.html
The Argentine case shows the channel can work when fiscal and monetary policy are tightly coordinated, but it also underlines that long-run sustainability is still an open question. Distant forward guidance is unlikely to solve the credibility problem if the policymakers themselves (including those you mention) are skeptical of binding commitments beyond a short horizon.
I am not an economist, but the idea that lowering rates will lower inflation in the long run is counter-intuitive. Are you sure that lower inflation is an effect of lower rates, rather than a cause?
i read it is a cause; eventually.
Although on the surface it might appear to be otherwise, I think the lower long-run inflation rate in the model comes from the lower inflation causing the lower interest rates in the distant future. As long as you have anything approaching a reasonable definition of expected inflation in the model, the only way a lower interest rate can be maintained is if the rate of inflation goes down. By including a Fisher equation and a reasonable manner in which expected inflation is determined, the model constrains the inflation rate to be lower in the long run.
I read these last two posts with interest because they were counterintuitive. Ending long-term debt can be deflationary? Thank you for writing them because it causes learning and thinking.
I have some questions. They may seem stupid, and I am sorry if they are. I was an interest rate trader, not a theoretical macroeconomist.
Does the model assume that the market will accept the notional amount of debt that would have to be auctioned in the STIR market vs. the longer-term market?
Is there a difference in the elasticity of demand relative to the expiration of the instrument? Are five year notes more in demand than ten year notes vs 30 year? If the elasticity is rigid, wouldn't cancelling long-term debt and going short-term see a corresponding increase in the short-term interest rate?
What happens when debt has to be rolled over?
My compadres in the interest rate world always thought when interest rates were at 0%, the US should have auctioned off 100 year bonds and rolled the debt to very long term, cheapening the cost of paying the deficit off. That's why this post is very interesting to me because it prices in expectations. If debt is short term, the country has to pay it, or roll it over.
How would an economy where the time value of money is nil or negative even work?
From the updated quote on the last post: “raising rates without any commitment from the Treasury to restrain deficits cannot resolve anything”
Keep your exact same model, but then add a line for total change in annual interest payments on a single bp change in rates. Under the longer term debt model there may be an immediate increase in government exposure due to higher short term inflation, but with the short term debt model in the long run when you have shifted to the short time debt regime the exposure to any rate increase is MUCH higher. Government exposure to shocks, either crises or fiscal ie political choices, increases. The price of the debt can go down with short term debt because risk has shifted from bondholders to the government! Here’s a model: switching to only short term debt is like writing a loaded gun into the first act of a play.
I think they should raise interest rates. People don't need to spend more, they need to save and inflation is the name of the game, keeping rates lower, isn't it!! Banks control it all and the Feds only " make a suggestion" which banks ignore... Congress will never be a help.