The least bad argument for NeoFisherism

There is no good argument for the NeoFisherian claim that rising nominal interest rates represent an expansionary monetary policy. But if forced to defend that position I would focus on long-term interest rates. That’s one area where the NeoFisherians are usually correct. Long-term rates are more likely to reflect the condition of the economy (expected NGDP growth), while short-term rates are more likely to reflect the liquidity effect of monetary policy.

I think it’s safe to assume that SF Fed President Mary Daly is not a NeoFisherian:

San Francisco Fed President Mary Daly said that recent rises in bond yields were akin to a rate hike.

Daly said increasing bond yields showed that financial conditions were tight, “diminishing” the need for further Federal Reserve interest rate hikes.

Milton Friedman had a very different view:

Low interest rates are generally a sign that money has been tight, as in Japan; high interest rates, that money has been easy. .   .   .

After the U.S. experience during the Great Depression, and after inflation and rising interest rates in the 1970s and disinflation and falling interest rates in the 1980s, I thought the fallacy of identifying tight money with high interest rates and easy money with low interest rates was dead. Apparently, old fallacies never die.

Nick Rowe has suggested that one argument against NeoFisherism is that Keynesian central bankers seem to know which way to turn the steering wheel. After all, inflation in places like the US and Canada has averaged about 2% since 1992. That’s probably not a coincidence.

But it’s worth noting that central banks don’t always get it right. And some of their biggest policy errors occurred during the 1960s and 1970s, when they assumed that monetary policy was contractionary because interest rates were high.

God help us if the Fed views rising long-term interest rates as a reason not to tighten monetary policy.

PS. That’s not to say we necessarily need tighter money—a debatable point. But rising bond yields are not a reason to be complacent.



29 Responses to “The least bad argument for NeoFisherism”

  1. Gravatar of bill bill
    9. October 2023 at 05:52

    I see this sort of comment more often than not. That long rates rising is tighter money. It’s frustrating.

  2. Gravatar of spencer spencer
    9. October 2023 at 13:59

    The FED’s technical staff doesn’t know a debit from a credit.

    Contrary to Dr. George Selgin, all monetary savings originate within the payment’s system. There is just a shift between transaction’s deposits and gated deposits.

    There is a one-for-one correspondence between demand and time deposits (as loans = deposits). As time deposits are grow, transaction’s deposits are depleted dollar for dollar (currency notwithstanding).

    The “demand for money” is the secret to Dr. Philip George’s: “The Riddle of Money Finally Solved”.

    “One man’s spending is another man’s income. When people are unsure about the future, they hoard their cash and sit on their hands. This reduces income to the next man, which likewise causes him to hoard cash and sit on his hands. This cycle repeats until the entire macro economy finds itself in a self-induced recession.”

  3. Gravatar of Randomize Randomize
    9. October 2023 at 16:34

    On a related note:

  4. Gravatar of David S David S
    10. October 2023 at 06:09

    Even with inflation falling and/or stabilizing in the 2% range I think people are going to remember the price surge of ’21-’22 for a while.
    Potentially, we’ll just adapt to slightly hotter NGDP growth for a few years, but I think that’s waning because of drags in real estate.

    My idiotic claim that we’re experiencing the ’90’s again might be coming true, but the timeline could be reversed.

  5. Gravatar of MSS1914 MSS1914
    10. October 2023 at 06:24


    According to the Fed’s website, they are paying a 5.4% rate on interest on excess reserves. The 10 year Treasury yield according to yahoo is 4.69%

    It seems logical to me that the 10 year yield should keep rising until it is equal with IOR rate. If I run a bank, why should I hold any treasuries when I can get a higher rate from the fed? Both options seem to be basically risk-free(?) If all banks act like that, wouldn’t their selling of 10yr treasuries lower the prices/raise the yields until they hit parity with IOR?

    Maybe long-term interest rates were once a reliable signal of future expected NGDP growth, but hasn’t IOR completely distorted that?

  6. Gravatar of Gordon Gordon
    10. October 2023 at 12:47

    Scott, it’s possible that Mary Daly made that statement because the rise in the 10 year treasury yield has been due to the rise in the real interest rate rather than inflation expectations. If the rise in recent months had been due to increasing inflation expectations then, yes, her statement would be of concern but that is not the case.

  7. Gravatar of spencer spencer
    11. October 2023 at 06:51

    @ Gordon: The Keynesian economists have achieved their objective. That there’s no difference between money and liquid assets.

    Interest is the price of credit. That means bank credit along with the activation of savings.

    As savings are activated, while bank credit is constricted, real interest rates obviously rise. High real rates of interest aren’t restrictive when they are accompanied by an increase in the transaction’s velocity of funds.

  8. Gravatar of TravisV TravisV
    11. October 2023 at 10:06

    It’s not just Daly:

    Deeply flawed thinking among influential elites.

  9. Gravatar of TravisV TravisV
    11. October 2023 at 10:07

    Prof. Sumner,

    Also please check out this five minute video of Michael Darda below on October 5th. We know he’s well-versed in market monetarism. But despite that, he still seems to believe in long and variable lags (at least of some sort)……

  10. Gravatar of ssumner ssumner
    11. October 2023 at 16:46

    MSS1914, No, I don’t think IOR changes things. Even with IOR, long rates do not reflect the stance of monetary policy.

    A bank might hold treasuries because they expect S-T rates to fall.

    Gordon, The statement is wrong regardless of whether you are looking at real or nominal rates. Real rates often rise due to a strengthening economy.

    Never reason from an interest rate change.

  11. Gravatar of Edward Edward
    12. October 2023 at 09:57

    Just want to remind people that Sumner read Bolton’s book, and despite 17 other people refuting what Bolton had to say, he cited Bolton’s own words (a known liar) as a piece of evidence against Trump.

    Bolton now is calling for WW3. He wants to bomb Iran.
    Bolton’s buddy Crenshaw, the one eyed moron, wants to bomb Iran, Russia and China at the same time.
    And another moron Sumner loves, Cheney, who he called a strong woman. I presume he means fat and corrupt equates to strength because I can’t see any other qualities there, tells us we are all now in a holy war.

    Who the fuck is “we”? It’s not definetly not me. I think there ought to be a new law. If you call for war, then you must put on a helmet, a flak jacket, grab a weapon, and go to the front lines of whatever battle you want to fight in.

    If you are 70, 20, doesn’t matter. You call for funding a war, or going to war, then you must immediately go to the front lines of battle.

    These people are mentally insane. They are brainwashed morons of the highest degree imaginable, who will destroy humanity.

    They should be in a mental asylum, not Washington.

  12. Gravatar of Solon of the East Solon of the East
    12. October 2023 at 15:24

    “Core CPI ex-shelter was up 1.9% YoY in September, down from 2.3% in August.”—latest CPI report

  13. Gravatar of spencer spencer
    13. October 2023 at 13:23

    Home prices fell during the GFC because Bernanke held the M1 money stock constant for 4 years, M1 NSA money stock peaked on 12/27/2004 @ 1467.7. It didn’t exceed that # until 10/27/2008 @ 1514.2.

    In contrast, Powell has only held the money stock, means-of-payment money, constant for 18 months, from $4,812.8 3/1/22 to $4,903.9 on 8/1/23.

    “Housing’s share of the economy remained at 15.8% at the end of the second quarter of 2023.”

    Link: “HOUSING IS THE BUSINESS CYCLE” Edward E. Leamer

    If you have half a trillion in retail MMMFs increase, and a trillion dollars in RRPs decrease, you get Atlanta’s GDPNow Latest estimate: 5.1 percent — October 10, 2023

  14. Gravatar of Edward Edward
    15. October 2023 at 21:12

    (Not the previous Edward)

    Thoughts on this?,registered%20in%20the%20Cayman%20Islands.

  15. Gravatar of Spencer Spencer
    17. October 2023 at 08:52

    “Retail sales rose 0.7% in September, more than twice what economists had expected, and close to a revised 0.8% bump in August”

    See: “Quantity leads and velocity follows” Cit. Dying of Money -By Jens O. Parson

    A decrease in RRPs increases liquidity. It turns outside money into inside money.

  16. Gravatar of spencer spencer
    17. October 2023 at 09:01

    Latest GDPnow estimate raised to 5.4 percent — October 17, 2023

    Daley is wrong.

  17. Gravatar of spencer spencer
    18. October 2023 at 02:59

    Seasonally mal-adjusted

    ” BUT on a non-seasonally-adjusted basis, retail sales actually crashed 5.4% MoM in September – that is the biggest drop for September since 2019…”

  18. Gravatar of Scott H. Scott H.
    18. October 2023 at 13:30

    I could see a causal mechanism behind rising long term interest rates driving expansion in the money supply. The rising long term rates would generally lead to higher spreads between long term and short term rates. That higher spread would generally lead to more lending from banks because banks like profit.*

    *That’s not to say that other mitigating or exacerbating forces may not also be at play during any given situation.

  19. Gravatar of ssumner ssumner
    18. October 2023 at 16:19

    Scott, Be careful in drawing implications from price changes. Banks might want to lend more at high rates, but borrowers might wish to borrow less. The final impact on the quantity of lending is uncertain.

  20. Gravatar of dtoh dtoh
    18. October 2023 at 21:20

    In some ways, I think a lot of the present difficulties in discussing monetary policy would go away if the dialog was framed around buying and selling assets rather than around adjusting rates.

  21. Gravatar of Ricardo Ricardo
    20. October 2023 at 12:44

    I haven’t seen Sumner post in a while.

    Did he take his fifth vaccine and keel over?

    I was certain he’d be raging by now, like his obese friend Cheney, at the lefts brazen attempt to occupy the capitol building.

    I could have sworn that unarmed people, occupying the building, were to be called ‘terrorists’ and relentlessly badgered in the media, 24/7.

    Shouldn’t we be afraid for our “democracy” at all these unarmed people in the capitol building?

    Where are the countless articles of the impending Nazi takeover?

    Where is the doomdsday fear?

    I thought he’d be demanding long prison sentences, along with a handpicked panel of low I.Q. members, that will cherry pick information for political gain?

    No? Oh, well. What can we say.

    I suppose we just have to remember Sumner’s utilitarian creed:

    “one rule for thee, another for me”

  22. Gravatar of spencer spencer
    21. October 2023 at 05:34

    Draining the RRP facility is concealed “Greenbacking” (“1860’s money”).

  23. Gravatar of spencer spencer
    21. October 2023 at 08:50

    Mises has it right:

    “The definition of M2 includes money market securities, mutual funds, and other time deposits. However, an investment in a mutual fund is in fact an investment in various money market instruments. The quantity of money is not altered as a result of this investment; the ownership of money has only changed temporarily. Hence, including mutual funds as part of M2 results in the double counting of money.”
    see: “Correlations and the Definition of the Money Supply”
    October 19, 2023

  24. Gravatar of spencer spencer
    21. October 2023 at 08:55

    Maybe we need another March 6, 1933 act.

    “Fed, ECB may slash bank reserves by 90% in new era of high rates, Fed economist paper shows”

    Case in point, the O/N RRP facility. Aug, 9 WSJ:

    “In their Aug 6. letter in response to our op-ed “How the Fed Is Hedging Its Inflation Bet” (Aug. 2), John Greenwood and Steve Hanke argue that the Fed’s sale of a trillion dollars of reverse repos does not in and of itself reduce the deposit liabilities of banks and money-market mutual funds, and that the money supply is unaffected. By that logic, none of the monetary tools of the Federal Reserve Bank would affect the money supply.”

  25. Gravatar of Doug M Doug M
    21. October 2023 at 10:35

    We can read long-term rates as the outlook for the path that short-term rates will follow. Rising long-term rates then show a changing expectation for short-term rates. This can then be interpreted to say that inflation will be more stubborn and the Fed will have to keep rates higher for longer, or the probability of a recession is decreasing and the Fed will not be cutting rates soon.

    There is a school of thought that says that when the yield curve is steep, i.e. long-term rates are high, that that is stimulative. Higher long-term rates provide an increased incentive to take on risk. Banks and financial market participants will borrow short (or reduce cash levels) and lend long, which increases the money supply. I think that this argument is more persuasive than the “higher rates are a tax” argument.

  26. Gravatar of Michael Sandifer Michael Sandifer
    22. October 2023 at 11:40

    In a blog post that will be published at midnight I argue, with data, that despite what appears to be very high NGDP growth, there’s probably no need for concern.

    I do acknowledge that NGDP is still above the pre-pandemic 10 year mean trend, and that ECI/NGDP is still low, while YOY inflation is still high. And, the Fed’s GDPNow forecast is still running above 5% for real growth in Q3.

    However, I also point out the number of ways market expectations indicate that inflation/high NGDP is not expected to be a problem in the future.

    1. Inflation expectations are still below the Fed’s 2% mean target in core PCE terms. That refers to the 5 year breakeven.

    2. Month-over-Month core PCE inflation has been near or below the Fed’s target for 3 months.

    3. To the degree oil prices are a factor in current inflation, the futures curve is pretty highly negative.

    4. The yield curve is still inverted.

    5. Stock prices are below their 10-year, pre-pandemic trend line.

    6. Stock earnings are also below their 10-year, pre-pandemic trend line.

    That’s quite a few forward indicators, along with MOM inflation and stock earnings, that signal that inflation/high NGDP growth concerns are overblown and that the problem is expected to be temporary.

    Also, what’s been missing from all the discussion about rising rates is the fact that rates almost always rise toward the end of economic cycles. I present, along with many other charts, a historical yield curve chart that demonstrates that yield curves reliably rise and turn quite positive before recesssions. This is presumably due to inflation also often rising at the end of cycles, with those recessions caused, at least in part, by the Fed overreacting to inflation spikes. That said, rising commodity prices, especially oil, is often a real factor at play.

    I have charts for all this data that any market monetarist would appreciate. I don’t think a recession of any importance is imminent, despite the inverted yield curve, because if it was, we’d already be in recession. At least for the moment, markets are predicting a soft landing, though the Fed Funds rate curve suggests that the predicted economic slowdown will come earlier next year than predicted two weeks ago, and will be a bit more severe.

  27. Gravatar of spencer spencer
    24. October 2023 at 06:32

    The demand for money can fluctuate widely:

    See: Money Market Funds; Total Financial Assets, Transactions (MMMFTAQ027S)

    So, R-gDp can fluctuate widely. R-gDp is based on short-term money flows, the volume and velocity of money. Inflation, on the other hand is based upon long-term money flows. Therefore, it is more important to target N-gDp, a more stable measure of income.

  28. Gravatar of spencer spencer
    26. October 2023 at 05:22

    “Real gross domestic product (GDP) increased at an annual rate of 4.9 percent in the third quarter of 2023 (table 1), according to the “advance” estimate released by the Bureau of Economic Analysis”

    Our means-of-payment money supply has flatlined. But the velocity of circulation has increased.

    Dr. Philip George:

    (1) “The velocity of money is a function of interest rates” and

    (2) “Changes in velocity have nothing to do with the speed at which money moves from hand to hand but are entirely the result of movements between demand deposits and other kinds of deposits.”
    Debits to deposit accounts have accelerated

  29. Gravatar of David S David S
    26. October 2023 at 11:02

    This is your quarterly reminder that NGDP growth is still probably too high. I’m sure that the new Speaker of the House will be open to modest increases in taxes and other sensible deficit reduction measures.

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