The standard line about economists is that if you asked any two of them for an opinion you’d get three opinions back. When we start to talk about macroeconomics, and even more about monetary policy, we get this problem redoubled. And so it is with this question of just when is the Federal Reserve going to raise interest rates. There’s those who insist that it’s not going to happen and we’re in a low interest rates forever world (this is a corollary of the secular stagnation argument). There’s those who insist that it’s imminent, that a raise too soon would be a really bad idea, asking to the mistake of 1937. Heck, I can even be found to have two contradictory opinions on this one question alone. Yes, they will soon and no they shouldn’t and then again, yes they should, but by reversing quantitative easing not by raising the Fed Funds rate. Quite what all of you out there are making of this we economics geeks aren’t quite sure. Probably not all that much to be honest, you’re probably not paying much attention to our arcane discussions.

But in that discussion here’s a couple of updates from today. Over in the NY Post we get this:

The first line of the FOMC’s statement said it all: “Information received since the FOMC met in January suggests that economic growth has moderated somewhat.”

Since that remark was in the first sentence, Wall Street took it seriously.

In her press conference, Yellen tried to put a more positive spin on this by saying that there had been a “slight downgrade of [economic] estimates for the year.” But, she added, “this is not a weak forecast.”

Yellen is either a preternaturally optimistic individual or delusional.

The argument here is essentially that the economic rebound has already , or is rapidly doing so, run out of steam. Therefore there’s absolutely no chance of a rise in interest rates to head off the rise in inflation that just isn’t going to happen anyway. This isn’t a million miles away from the worries about 1937 argument. Over at Business Insider we get an entirely different reading of the same runes:

In economics-speak, this means that the unemployment rate had hit NAIRU, or the nonaccelerating inflation rate of unemployment, or the unemployment rate below which inflation begins to take off.

Well, the Fed lowered this mark on Wednesday, meaning that it thinks there is more “slack” in the labor market than it had previously seen.

We’ll come back to this as it’s important but the argument here is that there’s still more slack in the economy so even if the growth does continue we’re not going to see inflationary pressure. But do keep this in mind:

Yellen also said that wage growth, which is something you’re going to need to see before inflation really comes roaring back, is not a precondition for interest rate hikes.

Quite, it’s standard that it takes monetary policy 18-24 months to influence the real economy. Meaning that to curb wage led inflation you’ve got to raise interest rates 18 months before that inflation happens. This is, of course, impossible, but it is what everyone is trying to do.

And now we come back to that more slack in the economy than we thought. That Nairu is lower than we think it is. This is something that I’ve touched on here before and that Paul Krugman has been talking about too. The essential insight we need is that this time really was different.

The standard analysis is that this “non-accelerating inflation rate of unemployment” is lower in the US than it is in most European economies. Get unemployment down below whatever Nairu is and you get inflation. So, therefore, the Fed is eying the unemployment rate as a guide as to when it should raise interest rates in order to stave off the inflation. However, this standard view isn’t entirely correct. As Richard Layard has been pointing out for a few decades now the short term unemployment rate in the US is very similar to the short term rate in Europe. It’s the long term unemployed rate which is (significantly) higher in Europe and which leads to the higher overall rate. There’s also a measurement difference: unemployment benefits tend to last forever in Europe so people can be unemployed and listed as such for years on end. In normal times unemployment pay in the US stops at 26 weeks. And if you’re not getting that unemployment pay then you’re no longer in the standard US measurement of unemployment.