Neo Fisherites

Fisher was another in a long line of mistaken economists who thinks disfinflation and rates are  correlated because of some expectation theory.  Plain simple math and flow of funds explains it, no need for the magic.  Here lets look over the entire 30 years since 1981:

There, I have even made it extra large, lets look. 1960, rates rise, inflation rises, until we get a recession. 1970, same, 1980, same.  Notice 1981, rates stayed high, inflation rose, until the recession, where rates and inflation diverged.  Note there is one exception to the rule, the Clinton period, in which DC began running a surplus, that is the one exception I find.  2003, rates and inflation mostly correlated, though inflation was slow to catch up, and rates slow to start rising. Then the crash. Since the crash we have mostly declining inflation and zero rates. The one exception was a dead cat double bounce. Overall, since 1980, rates have gone from 15% to zero and inflation has gone from 12% to 2%.

So we have two exceptions. 1) They diverge around recessions, and 2) they diverge when government runs a surplus. But otherwise, it is rates down inflation down. Take away those two exceptions, and most of the period has a likely 65 or better correlation between low rates and low inflation.

The theory is simple, the Fed is a monopoly and dominates the market.  When its earning are optimized, it is extracting funds from the economy. The earnings go to Congress, mostly, which should cause inflation having multipliers less than one.  And Congress does cause sudden inflation, just before each recession.

What about now?

I am not an expert on Fed flow of funds, but we had two months of a whopping 2% inflation, and are likely entering a long running bouncing recession. I do not think the Fed is working hard to keep rates down, they are naturally low (but I could be wrong) The current situation is rule 1 and 2, government spending large deficits combined with the Obamacare cost adjustment, the normal periodic recession induced by DC.