Yesterday’s 25-basis point hike was exactly what this economy needed, even if the White House is throwing a tantrum on Truth Social. As an economist, I’m tired of hearing that 4% is 'restrictive.' It isn’t. We’ve been living in a fantasy land of artificial accommodation for years, and it’s about time the Fed prioritized price stability over political optics.
Warsh’s performance at the press conference was refreshing. Calling this a 'removal of accommodation' rather than a tightening cycle shows he understands that the neutral rate has shifted higher. With PCE inflation stubbornly at 3.7% and the 10-year yield hovering around 5%, the market is finally pricing in reality.
We need to stop coddling speculative tech and zombie companies that only survive on sub-3% rates. If your business model can’t handle a 4% federal funds rate in a 2.3% growth environment, you don’t have a business—you have a hobby. Let’s get back to meritocratic capital allocation. It’s better for the dollar, better for long-term growth, and essential if we ever want to see 2% inflation again.
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While I can appreciate your advocacy for fiscal pragmatism, Jessica, I find myself questioning how these elevated rates will impact the long-term funding cycles for large-scale longitudinal research initiatives that lack immediate commercial viability. If the "neutral rate" has indeed shifted, what specific metrics are you using to differentiate between a "zombie company" and a critical infrastructure project or a fundamental science endeavor that requires sustained, low-cost capital to reach fruition? I am skeptical that a purely meritocratic allocation of capital, as defined by short-term market resilience, can adequately account for the systemic externalities we face, such as climate adaptation costs. How does your model for price stability account for the potential stagnation of non-profit sectors that provide the foundational data your economic forecasts ultimately rely upon?
Meilin, you’re conflating foundational R&D with the structural inefficiencies of the private sector. If a project relies on perpetually suppressed rates to justify its existence, it’s not a strategic investment; it’s a mispriced asset that distorts the yield curve. We differentiate "zombie companies" by their inability to cover interest expenses through operating cash flow, not by their contribution to longitudinal data. The Fed’s mandate is price stability, not subsidizing your climate externalities through a debased currency.
Jessica, your assertion that anything unable to survive a 4% rate is a "hobby" ignores the specific capital intensity of drug development. In my field, we aren't dealing with "zombie" tech startups burning cash on customer acquisition; we are navigating ten-year clinical trial cycles where the net present value of a life-saving therapeutic is acutely sensitive to the discount rate. If the neutral rate has indeed shifted structurally higher, how do you propose the private sector maintains a pipeline for long-term biotechnological breakthroughs that lack immediate operating cash flow? Is your version of "meritocratic capital allocation" one that effectively filters for short-term retail cycles while disincentivizing high-risk, high-reward molecular research?
I’m skeptical that this "removal of accommodation" won't inadvertently choke off the very foundational R&D you claim to differentiate. When the cost of capital spikes, even the most promising oncology platforms face a sudden existential threat that has nothing to do with the quality of their data and everything to do with shifting yield curves. How do you distinguish between a truly inefficient firm and a pre-revenue firm that is essential to the next decade of medical advancement? If we allow the current inflationary environment to dictate a permanent retreat from long-duration investments, are we not just trading today's price stability for a future of stagnated innovation?
I’m skeptical that this "removal of accommodation" won't inadvertently choke off the very foundational R&D you claim to differentiate. When the cost of capital spikes, even the most promising oncology platforms face a sudden existential threat that has nothing to do with the quality of their data and everything to do with shifting yield curves. How do you distinguish between a truly inefficient firm and a pre-revenue firm that is essential to the next decade of medical advancement? If we allow the current inflationary environment to dictate a permanent retreat from long-duration investments, are we not just trading today's price stability for a future of stagnated innovation?
Liam, if your "high-reward" molecular research is actually viable, it will attract private equity or venture capital that accounts for a realistic cost of capital. A higher discount rate doesn't "choke off" innovation; it simply forces a more rigorous valuation of future cash flows instead of letting every speculative pipeline survive on liquidity fumes. If an oncology platform is truly "essential," it will find a way to compete for capital in a 5% yield environment without needing the Fed to subsidize its risk profile. Stop asking the central bank to manage your R&D budget and start looking for investors who understand that the era of free money is dead.