Tuesday, December 10, 2019

The Interest Rate: Prime, Overnight, Or The Rate On T-Bills

As far as I am concerned, cost-push inflation is a manifestation of class conflict between workers and owners. In the late 1970s, Paul Volker and Ronald Reagan took the side of the owners. I am willing to accept that Volker genuinely believed in Milton Friedman's incorrect quantity theory of money. And, since then, workers have been getting a smaller share in increased productivity. Some obituaries of Paul Volker exhibit an understanding of what he did.

But I want to talk about my recollection of how interest rates have been covered in the press from that time. Of course, at any given time, there are a whole range and time structures of interest rates. When Volker drove the interest rate above 20 percent, the focus in news coverage was, as I recall it, on the prime rate, that is, the best interest rate commercial borrowers, such as large corporations, can obtain. My perception is that now, when movements in interest rates are reported on in the press, the emphasis is more likely to be on one of two rates. One is the overnight rate, that banks charge each other overnight. One can hear about the repo market, I guess, in this context. The other much-discussed rate is the rate on short term treasury bills (T bills).

Is my perception accurate? When did this change occur, if so? Is it actually an example of society learning? After all, the Federal Reserve has much more direct control over the latter interest rates and only indirect and tenuous control over the prime rate. Has Volker's demonstration that the quantity theory is wrong been generally taken on board?

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