Should rate rises be the same size as rate cuts? The problem of symmetry in monetary policy

Janet Yellen is in a tough spot.

The US Federal Reserve chair presides over a country where unemployment is just 5.3 per cent, the official interest rate is zero (technically 0 to 0.25 per cent), and there is huge pressure to not raise that official interest rate.

This is an odd eventuality, on the surface of things.

But there is plenty of precedent for being very cautious about raising rates.

Both Australia and New Zealand lifted interest rates from their GFC lows. Australia did so in 2009, NZ twice in 2011 and 2014. As these graphs show, both countries dropped their rates again afterwards.

Being hasty in raising rates is unwise. Yellen’s cautious stance is probably appropriate.

But her options appear limited. US rate changes, by convention, happen in lumps of 0.25 percentage points. Just like Australia’s and New Zealand’s. A 0.25 hike could frighten markets.

A number like 0.25 percentage points probably appeared vanishingly small back in normal times, when interest rates were much higher. But their size now raises questions.

The key question that I have been pondering: Should rate rises be the same size as rate cuts?

When economies tank, they tank hard. But recoveries are slower and more tentative. Look at the shape of unemployment — it rises steeply and normally falls slowly.

There is an implicit understanding that rate cuts can be bigger when falling than rising. The Australian government bundles groups of 0.25 together when things appear to be going south particularly quickly. For example a cut of 0.50 in 2012, and 3 cuts of 1.0 in late 2008 and early 2009.

But there is no explicit understanding that rate cuts could be smaller than 0.25 when they are rising.

There is no apparent technical impediment to this.

Australia is now perfectly capable at holding rates at levels more tightly defined than 0.25 per cent intervals, as this graph of the target and actual rate shows:

Rises of 0.1 per cent — or even smaller — could be just the trick at difficult times like this when a hike of 0.25 per cent seems frighteningly large.

Originally published at on October 17, 2015.

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