So what made Keynesian central bankers much more inclined to raise rates, and much less receptive to the argument that risks are asymmetric that waiting a bit too long is no big deal, while moving too soon can be a disaster than their colleagues, counterparts and former students outside the system?
I argued that it had a lot to do with the way that central bankers talk all the time to private bankers and that bankers are hurt a lot by low interest rates. Other people, however, questioned the premise, arguing that there was no good reason to believe that low rates were especially bad for bank profits.
May I say that recent events seem to have settled that argument in my favor? As negative rates spread around the world, banks are howling and genuinely suffering.
As the economist Tim Duy recently wrote on his blog: “The collapse in banking stocks suggests strongly that negative interest rates are not compatible with our current economic institutions. The system relies on the banks, and the banks need to make money, and they struggle to do so in a negative rate environment. Should it be any surprise that the threat of global negative rates is slamming the financial sector?”
And surely these adverse effects don’t begin only when interest rates are at zero; low rates must put a squeeze on banks as well.
So I think that we have an explanation for rate-hike bias: It’s the influence of the financial industry. At the same time, however, we also see that we’re just talking about influence, not complete control or anything close to it. The Fed has, I’d argue, been swayed by bank interests not by crude corruption, but simply by the fact of who they talk to all the time. That influence hasn’t stopped the Fed and other central banks from pursuing policies that the banks really hate in an effort to pursue their primary job, which is to stabilize the economy. At most, we’re talking about a tilt in policy.