Stability

The big news today is the US Federal Reserve’s big FOMC meeting. The expectation is that the Fed will announce a big rate hike, one of the biggest in decades. The previous rate hike amounted to 0.5%, and the expectation for today is 0.75%.

While it’s entertaining watching Jim Cramer and his ilk share their opinions on various matters which–I think–they likely have no clue about, it’s even more interesting learning about how institutions like the Fed really have no clue what they’re doing.

Who Controls Monetary Policy? #

The problem with monetary policy (in the US) as I see it is that the people who set the monetary policy have little incentive to act in the best interests of the ordinary working class like you and I. The Federal Reserve, after all, is technically an independent non-government entity (i.e., private), although the board of governors is appointed by the head of the government.

The Fed is governed by the Federal Reserve Act, which stipulates that the Fed is required “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates”.

The interesting bit of language is the “stable prices” part. As some may have noticed, prices haven’t been so stable around the world of late.

“Stability” Is in the Eye of the Beholder #

I find this interesting in part because it reminds me a lot of the problems in software. Software engineers often talk about “stability” when discussing software, which can take on various definitions depending on the context. The problem with this concept of stability is that the perception of stability varies depending on who you are. With software, stability is often just a matter of how good the person operating the computer is at using computers. I suppose a crude definition for stability is that your program shouldn’t crash or produce incorrect output.

In the case of the Federal Reserve, a lot of people seem to believe the Fed is responsible for making the stock market go up and to the right in a stable and predictable way. Of course the Fed maintains this is not the case, although the Federal Reserve Act doesn’t explicitly state that “stable prices” excludes stock prices as far as I can tell from the words in the bill.

One more thing: the people who make up the Federal Reserve’s board don’t exactly represent your typical end-user (aka the working class). Most of them are privileged folks who made a lot of money in private industry profiting from things that don’t really benefit the working class as far as I can tell. Banking in general is a business of middlemen extracting juice by squeezing those who have the greatest need, whether that’s someone taking out a mortgage for a home so they don’t die of exposure, or the $50 overdraft fee someone might be charged because they tried to spend $5 more than the remaining balance of their checking account.

One thing that seems to be pretty stable is the upward trend in corporate profits.

Software Stability and Economic Stability #

This is one of the reasons it reminds me of software. You can test each piece on its own and still have the whole thing behave strangely once real people start using it. Monetary policy looks similar. Economists can model one slice of the economy and still get blindsided when everything starts bouncing off everything else.

In software, “stable” usually means one thing to the people building it and another to the people stuck using it. A developer might mean “the test suite is green.” A user means “it didn’t eat my work.” The Fed has the same problem, except the split is more cynical: Wall Street hears “stable” and thinks predictable asset prices, while workers hear it and hope rent, food, and wages stop drifting further apart.

Misaligned Incentives #

Both domains suffer from misaligned incentives. Software developers might optimize for clean code or interesting technical challenges rather than user needs. Economic policymakers might optimize for indicators that look good in headlines (stock market performance, GDP growth) rather than metrics that reflect everyday economic well-being (real wages, wealth inequality, cost of essentials).

What Does True Stability Look Like? #

If we take the Fed’s mandate for “stable prices” seriously, we might ask what actual price stability would look like for ordinary people. Is it stable when:

• Housing costs consume an ever-larger percentage of income?
• Healthcare and education inflation outpace wage growth decade after decade?
• Asset prices (stocks, real estate) consistently grow faster than wages?

I’d call stability something more boring and more useful than “numbers going up.” It’s whether a person can get sick, lose a job, or hit a bad patch without their life immediately flying off the rails. We don’t build for that kind of stability because it usually means giving up some short-term upside, and our economic and political systems are basically allergic to that trade.

Who Benefits from “Instability”? #

There’s a certain irony in the fact that while the Fed pursues “stability,” the wealthiest segments of society benefit enormously from carefully managed instability:

• Market volatility creates trading opportunities
• Asset bubbles create wealth for those who already own assets
• Inflation erodes debt but hurts those living paycheck to paycheck
• Economic cycles allow capital to buy distressed assets cheaply during downturns

Meanwhile, the one metric that has shown remarkable stability is corporate profitability, which continues its upward march regardless of economic conditions. In Q1 2022, even as inflation squeezed consumers and supply chains remained disrupted, U.S. corporate profits reached record levels.

Building Better Systems #

If you actually wanted stability for regular people, you’d build systems around their failure modes instead of around investor expectations. You’d ask whether a rate hike cools prices without just making life worse for the people already getting squeezed, and whether the people making the call have any reason to care about that answer.

As we watch the Fed raise rates today in the name of controlling inflation, it’s worth asking: whose stability are they really engineering, and at whose expense?