Stephen Williamson vs. Laurence Mishin on Raising Interest Rates

     I wrote previously that Wall Street wants the Fed to raise interest rates. 

     "Over the past three months, businesses have added more than 1 million jobs, according to upwardly revised numbers from the Bureau of Labor Statistics. Though still anemic by historical standards—growth was close to 4 percent the last time the unemployment rate was this low, in mid-2008—wages rose month over month at a faster pace than anytime during the post-financial crisis recovery."

    "While the numbers generated mostly applause on Wall Street, they also raised another question: When will the Federal Reserve stop acting like the economy is in crisis?"
     http://diaryofarepublicanhater.blogspot.com/2015/02/if-wall-street-has-its-way-stephen.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+DiaryOfARepublicanHater+%28Diary+of+a+Republican+Hater%29
    
     Meanwhile, Stephen Williamson thinks we can actually improve the economy via interest rate hikes-or at least raise the inflation rate which ostensibly would raise AD which improves the economy. 

    "If I think about policy in terms of pegging a short-term nominal interest rate, I understand that, if the nominal interest rate goes down, and stays there, that the short run effect is more inflation (that’s the liquidity effect at work), but in the long run the Fisher effect takes over, and inflation actually goes down. Again, the liquidity effect ultimately dissipates. So, suppose we have been at the ZLB for a long time. The liquidity effect has dissipated, and the inflation rate is too low. How do I get the inflation rate up? I certainly can’t rely on a short-run liquidity effect, as the nominal interest rate can’t go down. There’s nowhere to go but up, and to rely on the long-run Fisher effect to take over ultimately. Of course, you may have to bear the effects of even lower inflation in the short run because of the liquidity effect."

   Mainstream New Keynesian types mostly don't know what to make of SW

   https://longandvariable.wordpress.com/2015/01/31/did-john-taylor-get-us-stuck-at-the-zlb/

   Mishin on the other hand is clearly in the ultra 'dove' camp on the Fed. 

    "The most important economic policy decisions being made about job growth in the next few years are those of the Federal Reserve Board as it determines the scale and pace at which it raises interest rates. Let’s be clear that the decision to raise interest rates is a decision to slow the economy and weaken job and wage growth. There are many false concerns about accelerating wage growth and exploding inflation based on the mistaken sense that we are at or near full employment. Policymakers should not seek to slow the economy until wage growth is comfortably running at the 3.5 to 4.0 percent rate, the wage growth consistent with a 2 percent inflation target (since trend productivity is 1.5 to 2.0 percent, wage growth 2 percentage points faster than this yields rising unit labor costs, and therefore inflation, of 2 percent). The key danger is slowing the economy too soon rather than too late."

     http://www.epi.org/publication/policies-that-do-and-do-not-address-the-challenges-of-raising-wages-and-creating-jobs/

     So is Janet Yellen closer to SW, to Wall Street, or to Mishel? 

     P.S. Mishin also points out that we still have some room till we get back even to the 2007 pre-recession level. 

     "The good news is that 246,000 jobs were created on average each month in 2014, faster than any year in the last recovery and since 2000. This job growth lowered unemployment to 5.6 percent in December. Unfortunately, we still have far to go before we recover from the financial crisis of 2008 and the recession that started after December 2007. Specifically, the Great Recession and its aftermath have left us with a jobs shortfall of 5.6 million—that’s the number of jobs needed to keep up with growth in the potential labor force since 2007—and current job creation rates will get us to pre-recession labor market health in August 2016.1 And even attaining this pre Great Recession labor market health is an insufficiently ambitious final goal – instead we should strive to reach genuine full employment with roughly 4 percent unemployment. Much is at stake.2 If we do not attain robust full employment then many communities, particularly those of color, will be left out of the recovery. Moreover, under current policy conditions significant wage growth for the vast majority may only occur when we achieve much lower unemployment than we now have.