Lettin’ It Marinate

American cuisine is complicated.  The nation doesn’t exactly have a uniform palette.  Instead we have regional differences.  Take marinades for instance.  In the Northeast, a common marinade is made with apple cider vinegar, maple syrup, mustard, garlic, and herbs.  In the South, a traditional marinade is made with buttermilk, hot sauce, garlic, and onion powder. In the West Coast, you might have something fresh and fruity with orange juice, lemon juice, honey, garlic, and rosemary. Our central bank works in an opposite fashion.  It may have several regional banks but only serves one flavor at a time.

Currently they seem infatuated with marinade.  The Federal Reserve Bank acts as the chef overseeing the marination of a dish. The primary ingredients are businesses and consumers. The marinade is monetary policy.  Like a marinade with three components (acid, oil, and seasoning), the Fed uses overnight rates, changes to its balance sheet, and public discourse to achieve a well-balanced, flavorful dish which represents a stable economy with two percent inflation.

For years the chef used a light marinade (low interest rates), allowing consumers and businesses more influence on the ultimate flavor of the economy.  The dish got out of balance (inflation went too high). To correct this, the chef is now opting for a stronger, more potent marinade (higher interest rates), giving it more influence on taste.  Economic ingredients may need to soak in this new marinade "for some time" to reach the desired flavor profile.

The stronger marinade makes it a bit more challenging for the ingredients to absorb additional flavors (capital and loans for businesses, consumer spending), slowing down the overall marination process (economic activity). The chef understands that switching back to a lighter marinade too soon would undo the corrective measures. Therefore, the more potent marinade (restrictive interest rates) may remain in place until the dish is balanced once again (inflation at 2 percent).

In economic terms, when President John Williams of the Federal Reserve Bank of New York says that interest rates will have to stay at restrictive levels "for some time," he's emphasizing that, just like marination, economic adjustments take time to materialize. They need to be administered with care, patience, and a long-term perspective to achieve the target inflation rate and, thereby, economic stability.  Bon appetite!