[HN Gopher] Federal Reserve to increase interest rates by 75 bas...
___________________________________________________________________
Federal Reserve to increase interest rates by 75 basis points for
the third time
Author : scrlk
Score : 130 points
Date : 2022-09-21 18:00 UTC (5 hours ago)
(HTM) web link (www.federalreserve.gov)
(TXT) w3m dump (www.federalreserve.gov)
| cs702 wrote:
| On a related note, since mid-April, the Fed has withdrawn -$140B
| of liquidity from the financial system:
|
| https://news.ycombinator.com/item?id=32929454
|
| and earlier this year announced that it plans to continue
| withdrawing liquidity from the financial system at the rate of
| $90B/month for the foreseeable future. The innocuous term for
| these withdrawals is "quantitative tightening."
|
| There are no historical precedents for quantitative tightening of
| this magnitude.
|
| It's the first time any central bank has tried it at this scale
| in a modern monetary regime.
| slaw wrote:
| at $90B/month it will take 89 months to unload.
| JumpCrisscross wrote:
| > _$90B /month it will take 89 months to unload_
|
| The optimal Fed balance sheet is estimated to be around $4tn
| [1].
|
| A Fed with a ballooning balance sheet distorts financial
| markets. A Fed with no assets must do weird stuff to fight
| inflation, which distorts financial markets. (In a non-
| reserve case, a central bank with no reserves goes bust.)
|
| [1] https://advisors.vanguard.com/insights/article/thefedspla
| nto...
| slaw wrote:
| Fed doesn't have to fight with inflation if it not creating
| one. So Fed's balance sheet could be as well $0
| JumpCrisscross wrote:
| > _Fed doesn 't have to fight with inflation if it not
| creating one. So Fed's balance sheet could be as well $0_
|
| Inflation has multiple causes. Fixed-money economies
| experienced inflation and deflation throughout antiquity.
| slaw wrote:
| Still, Fed is responsible for 90% of inflation.
| JumpCrisscross wrote:
| > _Fed is responsible for 90% of inflation_
|
| You're really jumping straight from proposing a zero-
| reserve central bank to theorizing the source of
| inflation?
| [deleted]
| nine_zeros wrote:
| Very interesting. So historically, it appears that the FED
| balance sheet reserves is 25% of GDP. I wonder what it is
| for other countries. Especially rapidly developing ones.
| JumpCrisscross wrote:
| > _wonder what it is for other countries_
|
| It varies pretty widely. I don't think there is good
| macroeconomic theory for its correct value, or even if
| there _is_ a correct value.
|
| https://tradingeconomics.com/country-list/central-bank-
| asset...
| nine_zeros wrote:
| It doesn't seem 100% accurate (see: UK balance sheet).
| But the pattern is evident. The older/more developed an
| economy, the larger the central bank balance sheet.
|
| Which also seems like a correct line of thinking to me.
| In younger developing countries, more money is created by
| individuals/businesses via credit. Central banks don't
| need a large balance sheet to encourage more lending,
| banks already have a high demand for loans and have very
| high interest rates for credit.
|
| In older/developed countries, less money is created by
| individuals/businesses via credit. So central banks are
| forced to increase the size of their balance sheet which
| allows banks to offer more money for lending by reducing
| the interest rates because without low interest rates,
| there will be no credit growth.
| cs702 wrote:
| $90B/month = $1.1T/year in withdrawals of liquidity from the
| financial system.
|
| A trillion here and trillion there, and pretty soon we'll be
| talking about real money.
| willturman wrote:
| Here is the historical (since 2004) time series and data:
| https://fred.stlouisfed.org/series/WALCL
| wbsss4412 wrote:
| Note that many people on this and other forums have been
| talking about how the fed just prints money forever and is out
| of control. This is them destroying money.
|
| It might not be enough for you personally, but let's not
| pretend that money printing only goes in one direction.
|
| Note: as a base expectation, you want to be printing a small
| amount of money unless circumstances dictate otherwise. In a
| growing economy, if the growth in the money supply doesn't keep
| up with growth, you'll eventually see deflation. This is
| explained by the following identity (where the velocity of
| money is typically observed to be fairly constant):
|
| [Price] * [output] = [velocity of money] * [money supply]
| MrStonedOne wrote:
| curiousllama wrote:
| To be fair, wasn't this preceded by 'quantitative easing' which
| itself had 'no historical precedents?'
|
| Like, it's in proportion to the last big thing we did, albeit
| in the other direction. I'd argue that's pretty close to
| precedent.
| cs702 wrote:
| There's at least one other historical precedent for insane
| levels of quantitative easing, Japan:
| https://fred.stlouisfed.org/series/JPNASSETS
|
| Japan has been at it for a long time:
| https://research.stlouisfed.org/publications/economic-
| synops...
|
| But AFAIK there's no historical precedent for persistently
| going in the other direction at such an insane scale.
| collegeburner wrote:
| oh c'mon. there wasn't really precedent for QE before '08 and
| they did it anyway. there sure ash wasn't precedent for buying
| corp debt ETFs as a even more radical form of QE in '20. the
| fed did those anyway but now that they're trying to wind it
| down that's somehow radical and needs a "innocuous term"??
|
| $90B/month isn't even making much of a dent in the balance
| sheet.
| leotravis10 wrote:
| Ken Klippenstein's great report over at The Intercept that even
| the Fed's own research warns that continuous interest rate
| increases could trigger a "deep recession".
| https://theintercept.com/2022/09/09/recession-federal-reserv...
|
| I can predict that next time around the Fed is going to trigger a
| full 100 percentage rate increase thus triggering a much deeper
| recession thus more layoffs and job losses as a result. It's by
| design really since even the Fed wants to get wages down and
| shift power back to the employer.
|
| Buckle up.
| boiler_up800 wrote:
| I am seeing companies really start to feel these rate hikes and
| the corresponding market moves. I can't tell where we are in the
| correction but it is definitely not at the start. I just hope
| it's somewhere close to the middle.
| maerF0x0 wrote:
| Anyone else notice Powell mentioned multiple times that they're
| trying to weaken the labor market? (and by extension the ability
| of workers to negotiate good wages, good conditions)
|
| Anyone know why?
| majormunky wrote:
| Workers making good wages increases demand on goods that are
| already in high demand.
| maerF0x0 wrote:
| > Workers making good wages
|
| Wouldn't that be a baseline value of a society? It makes me
| think that the price increases that are happening is simply a
| return to norms after we had like 50yrs of productivity
| increases w/o increasing wages -- meaning prices were
| actually suppressed.
| spaceman_2020 wrote:
| Third straight hike and core CPI is going up at more than half a
| percentage point monthly.
|
| CPI numbers, as reported, are very misleading. Nominally, it
| looks like its slowing down or plateauing (from 9% to 8.5%), but
| that's because the headlines always report the YoY number. The
| base effect is going to skew this towards a "inflation slowing
| down" narrative anyway.
|
| The MoM figures are far more relevant and they're not looking
| good at all, especially since its now moving towards the sticky
| kind of inflation (services, rent).
| barelysapient wrote:
| I haven't seen any reporting on how the recent and huge amounts
| of QE might factor into all of this. In my primate mind, wouldn't
| ongoing QE curb the impact of rising interest rates on inflation?
| datalopers wrote:
| QE was ended in March, and we're in full QT now.
| barelysapient wrote:
| Ended; but there's still about $8T on the books of past QE
| right?
|
| https://www.businessinsider.com/personal-
| finance/quantitativ...
| JumpCrisscross wrote:
| > _there 's still about $8T on the books of past QE right?_
|
| Yes, about $8.8tn [1]. The Fed is running them off at about
| $60n a month [2]. (The Fed's optimal balance sheet is
| estimated to be around $4tn [3].)
|
| The elephant in the room is the Fed's mortgages [4][5].
| Those will have to start being sold soon, since rising
| rates mean mortgagers aren't refinancing and thus a run-off
| strategy doesn't reduce holdings.
|
| [1] https://www.federalreserve.gov/monetarypolicy/bst_recen
| ttren...
|
| [2] https://www.federalreserve.gov/newsevents/pressreleases
| /mone...
|
| [3] https://advisors.vanguard.com/insights/article/thefedsp
| lanto...
|
| [4] https://www.ft.com/content/1a2e829e-de82-4083-abcb-
| ceeb46a45...
|
| [5] https://fred.stlouisfed.org/series/WSHOMCB
| bombcar wrote:
| The sparks will really fly when they begin to require
| FNMA and FHLMC conforming loans be assumable.
| nonameiguess wrote:
| Given your other comment, when you say "ongoing," what you mean
| is some of the assets they purchased remain on the Fed's books.
| If they don't continue buying, the fact that they still hold
| some of it doesn't have any further impact on rates on debt
| being offered in the future. They're doing more selling than
| buying at this point, which drives rates up. You don't need to
| dump everything at once to change the direction of movement.
| Think of like the strategic oil reserves. Selling any of it
| drives prices down. You don't need to sell literally all of it.
| tarunkotia wrote:
| I guess you meant QT and not QE.
| bendbro wrote:
| Ow, my 3x leveraged ETFs aren't looking so good.
| paulpauper wrote:
| how many people are buying these? It seems like the popularity
| of 3x funds has exploded over the past 2 years.
| mountainofdeath wrote:
| You would be surprised how many brand-new investors through
| their money in 3x levered ETFs and/or way out-of-the-money
| options and were right 3/4ths of time on accident. High
| school students were writing Hedge Fund managers asking for
| jobs as they did ridiculously well through blind luck.
| mountainofdeath wrote:
| Same here. Luckily, I pulled out of pretty much all of them in
| February when Putin invaded and I saw the writing on the wall.
| dougmwne wrote:
| Given that mortgage rates recently rose past 6%, seems to me this
| latest rate increase is going to put strong pressure on house
| prices. The rate has a huge impact on the monthly payment
| required to service a loan, more so than is immediately apparent
| without doing the math.
| alecco wrote:
| If (when) the Fed starts selling mortgage-backed securities in
| its balance sheet ($2 Tn), then it will be a bloodbath closer
| to 2007. And again, there's the problem of people with negative
| equity just walking out, causing a vicious cycle.
| plandis wrote:
| Good time to buy if you're wealthy with cash on hand.
| colinmhayes wrote:
| The biggest advantage of real estate investing is the easy
| access to cheap, reliable leverage. This is absolutely not a
| good time to get into a business that requires debt 4x higher
| than equity to make money.
| jayski wrote:
| can you elaborate a little more?
| ferdowsi wrote:
| I'd disagree that it's a good time to buy now, as prices
| are still high. But if prices start to decline
| substantially it will be a good opportunity, as you can
| refinance a high rate mortgage during low rate periods
| (like many people did in the last few years)
| gjs278 wrote:
| friedman23 wrote:
| As someone that has been exploring real estate for the first
| time, after speaking with some people it seems that mortgages
| have generally been less expensive than rent? Good luck finding
| something like that with today's prices and interest rates.
| freeone3000 wrote:
| If this isn't true for your area, the general advice is to
| wait a few years. Your mortgage payments are locked in, rent
| increases year-over-year at single- or double-digit percents.
| unethical_ban wrote:
| Mortgages can be refinanced at a lower rate when the market
| allows, correct?
| bombcar wrote:
| Correct, however there are costs associated with
| refinancing (either "built in" or upfront) and in some
| cases the refinanced loan has fewer protections. For
| example, a purchase loan in California is non-recourse,
| but a refinance is not.
|
| However, you can get "trapped" as I did if you bought
| near a high point, and then interest rates _and_ prices
| dropped, and since I was now "underwater" I couldn't
| refinance, even though I was perfectly capable and did
| continue to pay on the original loan. Eventually the
| property appraised high enough to refinance again.
| toast0 wrote:
| > For example, a purchase loan in California is non-
| recourse, but a refinance is not.
|
| That's not the case for refinances after Jan 1, 2013.
| bombcar wrote:
| Good to know!
|
| https://www.bankruptcysoapbox.com/california-extends-
| protect...
| bluGill wrote:
| IF/WHEN the market allows.
|
| There is no particular reason to believe rates will go
| down again. They might, they might not. Historically
| todays rates are around the normal low.
| randomdata wrote:
| Rent has skyrocketed recently, largely because people are
| afraid to buy houses right now, thus more demand for rental
| units. A mortgage may still be cheaper if you can stomach the
| reality that you might quickly end up underwater.
|
| That said, if you have rent control locked in, the choice is
| likely easy.
| friedman23 wrote:
| My comment is saying rents are cheaper not mortgages.
| paulpauper wrote:
| _Given that mortgage rates recently rose past 6%, seems to me
| this latest rate increase is going to put strong pressure on
| house prices. The rate has a huge impact on the monthly payment
| required to service a loan, more so than is immediately
| apparent without doing the math._
|
| People keep hoping or expecting this, yet prices keep going up.
| As long as wages for top earners keep rising, so will demand in
| expensive areas. Also, real estate did well in the 90s despite
| high interest rates, too.
| ryandrake wrote:
| Prices are not dropping, but sales are drastically slowing
| down and properties are staying on the market for longer. At
| least in the Bay Area, a few months ago it was unheard of for
| a home to stay on the market a month. Now they're sitting
| there. Definitely think rates are affecting how much buyers
| are willing to spend.
| jejeyyy77 wrote:
| Slowing sales could be the result of low inventory. That
| is, sellers are not eager to list/sell. Everyone is waiting
| and seeing.
| theptip wrote:
| Right, it's a terrible time to take on a new mortgage, so
| there is a strong disincentive for owners to sell at this
| time.
|
| If you're on a fixed-rate 3% mortgage that loan is
| looking extremely valuable vs. the best rate you can get
| right now.
| frumper wrote:
| Low inventory is why they were going in a couple days.
| latchkey wrote:
| A buddy of mine ended up renting out his condo right next
| to Dolores Park (ie: pretty great location in SF) after
| it sat on the market for a few months (including lowering
| the price). It rented immediately. Places are not
| selling.
| fckgw wrote:
| Home sales have been falling for several months in all the
| major US metros though.
|
| We won't see 2008 again but prices will be coming back down
| to earth from their pandemic rocket ride.
|
| https://www.nar.realtor/blogs/economists-outlook/existing-
| ho...
| uptownfunk wrote:
| Prices have corrected across the market, where are you seeing
| prices going up.
| jejeyyy77 wrote:
| Have they? Certainly have not seen this beyond prices for
| rural/exurb properties that shot up during covid - even
| those prices have just come back to what they were before
| covid.
| uptownfunk wrote:
| That's what I meant by the correction - correction to pre
| COVID levels. The truth is there are many areas where
| prices have yet to correct to pre-COVID levels of price
| and growth. If this is driven by inflation then it may
| take some time (~5 years or so based on what I am reading
| elsewhere). If it doesn't then maybe this is a systemic
| increase due to the shift of high earners out of
| traditional HCOL areas (Bay area, NYC)
| friedman23 wrote:
| > yet prices keep going up
|
| Prices have plateau'd or gone down
| qaq wrote:
| They are coming down (maybe not in SV), but I've being
| watching Riverside county and it's being very noticeable.
| hot_gril wrote:
| I look at rent to gauge the real cost of living somewhere,
| cause that takes land speculation out of the equation. It
| seems like house prices in expensive areas have been rising
| way more quickly than rent.
|
| So yes, I expect this rate hike to cause a big dump in house
| prices. In a few months or so I'll be right or wrong.
| paulpauper wrote:
| _So yes, I expect this rate hike to cause a big dump in
| house prices. In a few months or so I 'll be right or
| wrong._
|
| But it's also possible that it's priced in. It's been
| expected for the past 6 months the fed would raise rates a
| lot.
| hot_gril wrote:
| Could be. There's a recent dip in median Sunnyvale home
| prices that might be this, but I wasn't following the
| news enough to tell how closely the Fed decision aligned
| with expectations.
| jollyllama wrote:
| Quite possibly. It depends on what happens to supply and how
| desperate people are to sell.
| vsareto wrote:
| Housing demand is supported by investors who probably never pay
| interest on the homes they buy, so I doubt you will see much
| decrease. I don't think you can really control home prices with
| interest rates any more.
| dougmwne wrote:
| It seems there are still lots of mortgages issued in the US.
| Prices are set at the margin, so small decreases in demand
| can have a big impact on price. Looking at the data, I don't
| see evidence that no one loans money to buy houses anymore.
|
| https://www.statista.com/statistics/205937/us-mortgage-
| origi...
| maxfurman wrote:
| I'll echo what some folks have said in other threads, we've had
| rates down near zero for fifteen years, and we've got to get them
| back somewhere near historic normals at some point. If only so
| they can be cut again during the next crisis. How much is our
| entire culture the result of cheap money?
| ferdowsi wrote:
| A substantial chunk of the tech industry are speculative zombie
| companies that are built on the edifice of zero interest.
| idoh wrote:
| Can you elaborate? When I think of tech I think of venture
| funded (equity side), not debt funded.
| bombcar wrote:
| The argument is that easy "free money" causes money to flow
| into equities, and that money goes in search of better
| returns which includes venture funding.
|
| The moment the economy tightens up, suddenly the venture
| funds have less money.
|
| I'm not sure what's causal in it all, but from the outside
| it certainly looks like that's what happens.
| selectodude wrote:
| >suddenly the venture funds have less money.
|
| It's not that they have less money, it's just that when
| 1yr treasuries are paying over 4%, the returns in risk-
| adjusted investments need to either return a lot more or
| die.
| jhallenworld wrote:
| Probably both matter: suppose your grandma is your angel
| investor. If suddenly equities plummet, grandma sees less
| in her portfolio, so the funds available for angel
| investing are no longer there.
|
| This is happening to me right now with my parents not
| being able to help as much with my kids' college tuition.
| eftychis wrote:
| Scratch that (true, but the whole economy I counter needs
| cheap enough money to grow); the U.S. government is the
| biggest borrower I counter-claim. So taxes got to go up while
| the economy somehow keeps growing for this to be sustainable.
| Ergo, it is not in a matter of years, and I would say that is
| the common "secret."
|
| The hope is that everyone is going to march in line and not
| go out asking for raises due to inflation; so that we end up
| with "hyper-inflation" before the supply chain system
| stabilizes, maybe the Russo-Ukraine conflict sees some light,
| and the U.S. Treasury can decide they can't sustain this any
| longer.
|
| Thus, we are praying for all these pieces to kinda fall into
| place, so we don't end up with hyper-inflation, recession and
| interest rates going down all at the same time.
|
| P.S. You can follow the target to actual rates here
| https://www.newyorkfed.org/markets/desk-
| operations/reverse-r...
|
| Click All to see the difference in scale we are talking about
| to the past. 2 Trillions are parked to the Fed by banks,
| accumulating the new high interest, waiting for a signal to
| be re-enter.
| paulpauper wrote:
| What were interest rates in the late 90s? hmm...even higher
| than today, yet that was the biggest tech bubble ever. If VCs
| and other investors expect to make >100% in a year , what
| does it matter if the interest rate is 3% or 1%?
| Victerius wrote:
| Let them fail.
| arberx wrote:
| Since tech companies use other tech company's products this
| implies the tech industry is a speculative bubble.
| spaceman_2020 wrote:
| Valuations are definitely in a bubble
|
| Most of these unicorns simply can't turn a profit with
| their current cost structures. And even if they do, the
| profits will be so small that the valuations will simply
| not be justifiable.
| mym1990 wrote:
| I'm not sure dependency implies a bubble, rather a risk.
| For companies like Amazon(AWS), there certainly is an
| element of being too big to fail because AWS and similar
| cloud operations provide so much of the infrastructure for
| other applications.
|
| The bubble can clearly be seen by the disassociation of
| valuations from the underlying value, which for many new
| companies is nothing.
| hot_gril wrote:
| It is partially. There's some basis in reality since it's
| actually very profitable overall, but the investment goes
| beyond reality. I'm not saying you shouldn't invest in
| tech. It's possible this bubble never goes away.
| Alex3917 wrote:
| Startups generally have only very limited (if any) access to
| money anyway, so making money more expensive for established
| companies is probably a net positive for folks who are
| legitimately trying to start real software businesses.
| JamesBarney wrote:
| Not really. The money a startup is going to make is farther
| in the future than an established company.
|
| If you look at discounted future cashflow, a startup as an
| investment opportunity is much more influenced by the
| interest rate than an established company because a larger
| % of the value is coming from money farther in the future.
|
| Basically 20% of net present value of Microsoft comes from
| the money it'll make next year and 5% from the money it'll
| generate 5 yrs from now.
|
| But a startup is the opposite where 0% of the value of the
| startup comes from the profit it'll make next year, and 20%
| from the profit it'll make in 5.
|
| And when interest rates change it reduces the present value
| of the profits in 5 years by far more than it reduces the
| profits next year. Reducing the value of the startup
| relative to Microsoft, reducing the startups ability to get
| funded more than Microsofts.
| Alex3917 wrote:
| > reducing the startups ability to get funded more than
| Microsofts.
|
| So for 99% of startups (who don't raise venture capital
| anyway) there is no difference. But for Microsoft there
| is a huge difference, which is why the big tech companies
| are doing layoffs. Whereas we're not seeing many
| Indiehackers posts about people working out of their
| parents' basements who are laying themselves off.
| JamesBarney wrote:
| People get this backwards all the time. The fed did not cause
| cheap money, an aging population, sovereign wealth funds, and
| increasing inequality caused cheap money. The fed just responds
| by setting the interest rate to appropriately set the interest
| rate so we have full employment.
| hot_gril wrote:
| The Fed creates money, which nothing else can do. Of course
| the money supply has its own ebb and flow from private banks
| and such offering loans, but it's hard to ignore M2 doubling
| every 10 years.
| qeternity wrote:
| I agree with your sentiment but this isn't true, in fact
| for most of the Fed's life it was not the primary creator
| of money.
|
| Fractional reserve banking (which, by definition, the Fed
| is) creates money. If I deposit $1,000 into my local bank,
| and they turn around and lend $900 of that back out, that
| creates money.
| hot_gril wrote:
| The money supply has been steadily but quickly increasing
| for decades now. That can't be a result of fractional
| reserve banking alone. When I say the Fed creates money,
| I'm referring to the virtual printing.
| qeternity wrote:
| The supply of money has been increasing since the
| invention of money. Humankind would be incredibly
| resource constrained otherwise.
| hot_gril wrote:
| Why resource-constrained? It's money, not something with
| utility. There's already a deflationary currency of
| sorts, in the form of passive low-risk investments. Old
| money was precious metal.
| andrekandre wrote:
| > If I deposit $1,000 into my local bank, and they turn
| around and lend $900 of that back out, that creates money
|
| im kind of ignorant so please forgive if this is not
| correct, but i've heard its not necessarily "creating"
| money since its (the 900 dollars) all on the balance
| sheets as liabilities?
| MichaelConlon wrote:
| While it is not technically "creating" new money it is
| expanding the supply of money (credit) in the economy. In
| the above example you still have $1000 owed to you and
| the company/person receiving that loan now has $900.
| That's a total of $1900 of "real" money generated from
| your $1000 deposit. The balance sheets net out to zero
| but there is in effect an extra $900 now in the economy.
| qeternity wrote:
| You're splitting hairs that can't be split. Increasing
| the money supply is creating new money.
|
| Money is created and destroyed all the time.
| qeternity wrote:
| Money supply is not a fixed constant, it never has been.
|
| But under your argument, then the Fed doesn't technically
| create money either. It lends money like any other bank.
| Now this money is created out of thin air, but in theory
| it's eventually repaid.
| hot_gril wrote:
| > in theory it's eventually repaid
|
| No, it doesn't have to be. And other banks cannot create
| unlimited money like the Fed can.
| nine_zeros wrote:
| > If I deposit $1,000 into my local bank, and they turn
| around and lend $900 of that back out, that creates
| money.
|
| While you are right about fractional reserve creating
| money, this example is a common misconception. When you
| deposit $1000, the bank assumes a reserve of $1000 and
| lends out $9000. This, is assuming the bank has enough
| reserves on hand. And reserves for the bank is either
| central bank money (given by fed) or treasury bonds
| (bought from your $1000 deposit) or MBS (bought from your
| deposit).
| qeternity wrote:
| I'm not sure you understand how this works. It's not a
| common misconception, it's literally FRB.
|
| The bank might turn around and borrow from the Fed and
| use the deposits as reserves, but that has more to do
| with rates markets and nothing to do with FRB.
| nine_zeros wrote:
| This video series might help more:
| https://www.youtube.com/watch?v=KvpbQlQwl0A
| a-user-you-like wrote:
| Yep, we print 40% of all known money in the last 2 years,
| needlessly lock everyone down, and then complain that the
| rent is too damn high
| encryptluks2 wrote:
| Poor landlords must be suffering owning houses and all
| while everyone else is enjoying facing homelessness
| greatpostman wrote:
| This is an insane assertion. The fed has made consistent huge
| mistakes in monetary policy. No serious investor or public
| financial figure thinks these cheap rates were necessary
| JamesBarney wrote:
| Lots of people who wished the natural interest rate was
| lower liked to blame the Fed instead of fundamentals. But
| if the Fed has set the interest rates too low we would have
| had runway inflation from an overheating economy instead of
| a low prime age employment % (which suggests the interest
| rates were too high).
| greatpostman wrote:
| No you don't get it. Risk assets are priced from interest
| rates. Low interest rates inflated assets, which caused
| mass wealth inequality and excess wealth made by owners
| of capital. The picture is way more complex, we have had
| deflation due to outsourcing and technology. So it's been
| impossible to get inflation.
| bryanlarsen wrote:
| We live in a world that is awash in capital because old
| people & rich people have a large amount of capital. When
| the supply of something is high, the price goes down. And
| the price of capital is interest rates.
| greatpostman wrote:
| The excess liquidity comes from low rates. No serious
| financial investor thinks otherwise
| thechao wrote:
| I had literally never thought of this in any way. I've
| just finished reading two papers: one which shows that
| net-investment isn't really correlated to savings or
| interest rates which exactly supports your position (with
| data!); and, a second which shows that the ratio of old-
| to-young people is an incredibly good predictor of
| interest rates (with data!).
|
| You're both right? I suspect that means there must be a
| third option.
| bryanlarsen wrote:
| $6T of QE is about 1/10th the size of the US bond market
| and 1/20th the size of the US stock market.
| colinmhayes wrote:
| This is an insane assertion, if only because the Fed is run
| by public financial figures.
| jollyllama wrote:
| >How much is our entire culture the result of cheap money?
|
| Only the parts involving housing, education, transportation,
| employment, and investments.
| jejeyyy77 wrote:
| so everything lol
| kyrra wrote:
| College Education pricing has many blames beyond cheap money.
| The fed getting involved in student loans have totally broken
| that segment of the economy.
|
| 1) Federal loans do not have limits on amount.
|
| 2) Loans are non-discharged (you can't shed them in
| bankruptcy).
|
| 3) There is no intensive for schools to charge less. (schools
| likely should have skin in the game if borrowers end up
| shedding debt through time expiration or bankruptcy).
|
| 4) Loans or the amount of the loans are not weighted at all
| by the future prospects of the person.
|
| I have other issues with college today. They weren't
| originally set up for getting people trained for work, but
| many people now look at them as a form of trade school. But
| many of the majors available aren't actually job training in
| any fashion. Most people would be better served by trade
| schools or apprenticeship, but the US hasn't figured out how
| to do this well yet. This is more of a cultural problem, that
| I hope employers can figure out. Coding bootcamps seem to be
| an answer for the software industry, but we need to push more
| people that way, rather than college.
| jollyllama wrote:
| Yes, #2 is quite pertinent. I think the money would not be
| so cheap if student loans could be discharged.
| xyzzyz wrote:
| > Federal loans do not have limits on amount.
|
| This is false.
|
| > Loans are non-discharged (you can't shed them in
| bankruptcy).
|
| They're also not collaterized. As a taxpayer, I'd be very
| much against a non-collaterized loan that anyone can get
| without much care for credit risk, that's dischargeable in
| bankruptcy. In private sector, dischargeable debt with no
| collateral, like credit card debt, has 20%+ rates for
| people with low credit scores.
|
| > 3) There is no intensive for schools to charge less.
| (schools likely should have skin in the game if borrowers
| end up shedding debt through time expiration or
| bankruptcy).
|
| If debt is held by federal government, the students
| defaulting will not be much of an incentive to the school.
|
| > Loans or the amount of the loans are not weighted at all
| by the future prospects of the person
|
| Indeed. The most recent loan forgiveness plan is basically
| mechanical engineers subsidizing drama majors.
| paulpauper wrote:
| you forgot the most important variable: the college wage
| premium, which is the widest ever and shows no signs of
| narrowing. As long as college grads earn a lot more,
| tuition will go up. Even after factoring in debt, grads
| still earn more than non-grads.
|
| _Most people would be better served by trade schools or
| apprenticeship, but the US hasn 't figured out how to do
| this well yet._
|
| This may apply to college dropouts, but college still pays
| way more than trades, and also trades work req. a lot of
| training and time and you have to join a guild.
|
| _Coding bootcamps seem to be an answer for the software
| industry_
|
| Except that bootcamp grads tend to be woefully deficient in
| skills and also have a hard time finding jobs, also
| bootcamps can be very expensive and inflate their success
| metrics. I am not saying that college is the answer, but
| it's not bootcamps.
| tssva wrote:
| "Most people would be better served by trade schools or
| apprenticeship, but the US hasn't figured out how to do
| this well yet. This is more of a cultural problem, that I
| hope employers can figure out."
|
| Employers including technology companies used to provide
| training and apprenticeships but purposely shifted their
| job training costs on to job seekers and the education
| system. You are in effect looking to those that are largely
| responsible for the current situation to provide the
| solution.
| snovv_crash wrote:
| This was apparently due to the fact that employees would
| leave to a different company after receiving the
| training. However, companies also cut things like
| pensions which would result in longer term employee
| retention, so I'm not convinced by this argument.
| rustybelt wrote:
| Healthcare too. Cheap debt and outsized investment returns
| have been keeping health systems fat for years.
| Analemma_ wrote:
| What does "historic normals" mean? Obviously rates need to be
| going up right now, but if you look at the very long (i.e.
| centuries) trend of natural interest rates, there's a clear
| monotonic downward trend. Who's to say the natural rate of
| interest isn't zero?
| pfortuny wrote:
| Either you can create value (which seems reasonable as long
| as we receive free energy from the sun) in time or not. If
| you can, the natural interest rate cannot be zero.
|
| We are at the moment in time when we can make the most out of
| "thin air". It makes no sense that the rate is effectively
| zero.
| Victerius wrote:
| 8-15%. I'm looking forward to it. It'll force more people to
| be more financially responsible. No one should finance
| furniture, ATVs, or electronics. If you can't pay cash for
| these things, save, or don't buy.
|
| Edit: @Analemma That's just the extreme end of the scale.
| 30yr fixed mortgage rates were above 10% during all the
| 1980s[]. I'd like to see a return to that.
|
| [] https://fred.stlouisfed.org/series/MORTGAGE30US
| Analemma_ wrote:
| This definitely needs a citation. Why would the natural
| rate be 8%, never mind 15%? Apart from the Volcker Shock
| it's been less than that for literally all of American
| history [1]. Are you sure you're not just assuming that
| whatever the rate was in your formative years is "natural"?
|
| [1]: https://advisor.visualcapitalist.com/wp-
| content/uploads/2020...
| bryanlarsen wrote:
| The historical interest rate for savers is negative. Before
| the invention of fractional rate banking, if you had money
| you had to pay guards to protect it for you.
| ProfessorLayton wrote:
| >we've got to get them back somewhere near historic normals at
| some point.
|
| Not a monetary expert here, but do we? Japan has been at
| zero/near zero since the mid 90s.
| sbaiddn wrote:
| They've also been stagnant since the 90s
| HelloMcFly wrote:
| This is an honest question borne of ignorance: in what ways
| does that matter? I'm sure it does, but people over there
| are employed, they have a larger safety net, more
| accessible healthcare access AND better outcomes, seemingly
| less crime, education seems to be something of a wash
| (though there is so much variability in the US it's almost
| a waste of time to do a nation-to-nation comparison).
|
| I only know the major bullet points though, and I haven't
| found this terribly easy to parse myself. I'm also quite
| confident that stagnation in the US would manifest
| differently (not that it _must_ but that it _would_ ) so
| this is really just overall curiosity.
| marcusverus wrote:
| This seems like a very hand-wavy comparison. By the
| numbers, the difference is enormous--Japan's average
| household net-adjusted disposable income per capita is
| $28,900. For direct comparison, the USA's average is _77%
| higher than Japan 's_ at $51,100. Japan's average is even
| below the OECD average (which includes a mix of leading
| Western countries and less developed countries like Costa
| Rica and and Hungary) by 5%.
|
| [0]https://www.oecdbetterlifeindex.org/countries/japan/
| [1]https://www.oecdbetterlifeindex.org/countries/united-
| states/
| spaceman_2020 wrote:
| It doesn't, really. A society that plateaus at a high
| standard of living is a very good end result.
|
| However, the world isn't equal, nor is the wealth equally
| distributed. If all of the rich, developed world was to
| slow down and become stagnant like Japan, where will the
| demand for goods and commodities made by the developing
| world come from?
|
| Huge western demand helped lift hundreds of millions in
| China and India out of poverty, for instance.
|
| Stagnant growth might be good for an individual country,
| but it can doom developing countries to similar
| stagnancy.
| plandis wrote:
| Japans declining population is surely influenced to some
| extent by their fiscal policy. I don't think being near as
| low as it has for them has been a huge success?
| digianarchist wrote:
| Japan also has low inflation.
| collegeburner wrote:
| there's a joke in economics. there's 4 types of economies:
| developed, developing, japan and argentina. japan is weird
| ash and economics still doesn't understand why but it's a
| pretty safe bet that it won't translate super well to
| America.
| fny wrote:
| I'll mention something that most people are forgetting. The Fed
| was forced to cut rates to zero for a long time because fiscal
| policy was not stimulative enough.
|
| Rates are a shitty stimulative tool. Here's Bernanke in 2012:
|
| https://www.theatlantic.com/business/archive/2012/12/ben-ber...
|
| Low rates help people with money borrow more cheaply, accrue
| more wealth, and kick bankruptcy cans down the road
| indefinitely. It also royally screws over your average saver
| and pension fund who's forced to take on more and more risk for
| any sort of meaningful return.
| nine_zeros wrote:
| > The Fed was forced to cut rates to zero for a long time
| because fiscal policy was not stimulative enough.
|
| It's not just fiscal stimulus but "how" the stimulus was
| applied.
|
| It's not like the government isn't spending enough. It is
| spending. Until recently, all the spending went on tax
| credits and military.
|
| What we need is fiscal stimulus in industries of the future.
| Only the current administration gets it and made it happen
| with the recent bill to support new energy transition.
|
| We need more fiscal stimulus in cheap production of pills,
| medical practitioners, hospitals, daycare services and
| housing. Literally just give incentives to produce more units
| of these.
| tuatoru wrote:
| Oh, I think there's enough to do in "legacy" areas: roads,
| bridges, ports and airports, water supplies, electricity
| transmission grids, and so on. Also flood control measures
| and drought and wildfire mitigation.
|
| Your industries of the future won't operate well if the
| basics aren't kept up.
| fny wrote:
| I'm the parent commenter, and I _strongly disagree_ with
| the idea that stimulus should be directed by the federal
| government.
|
| The federal government is an extremely poor resource
| allocator. It knows nothing about local and personal wants
| and needs. In my view, funding should be dolled out to
| individuals and maybe local governments. That way money
| flows from the bottom up, not top down.
|
| The money flow is an extremely important factor: when money
| flows to individuals, each individual gains "votes" to
| allocate resources. Those votes informs how and where the
| economy grows at a granular level. The federal government
| cannot do this with any level of precision or efficiency.
|
| If higher levels of government need money to do things,
| they should tax for--this includes some portion of the
| transfer payments. I know it sounds redundant for the
| government to tax money they've handed out, but I think
| governments need to feel the pain of working to get the
| money in the first place.
|
| I'm also convinced you would dramatically reduce the amount
| of fraud and favoritism that occurs since decision making
| will end up being decentralized.
|
| Here's a "hot take" example. The federal government funding
| child care is a dumb idea.
|
| 1) Not everyone needs child care.
|
| 2) Not everyone needs child care in the way the federal
| government wants to provide it.
|
| 3) An entire bureaucratic apparatus needs to be developed
| to define what child care is, what constitutes valid child
| care, who can provide child care, blah, blah, blah. This
| will be expensive to manage and will metasticize in its own
| way over time.
|
| So why not just give people money to people who have young
| children to do whatever they want to do with it?
|
| Maybe you add some provisions to prevent people from making
| babies to cash in checks, but I'm assuming writ large I can
| trust my fellow citizen to make better decisions about
| their child care than whatever "governmental apparatus" we
| want to create to do that for them.
| nine_zeros wrote:
| It is exactly this thought process that is preventing
| good fiscal stimulus during recessions.
|
| Well intentioned thoughts like these are a good default
| for the government running in cruise control - when there
| is no financial volatility. A stimulus is only required
| during a recession. In each recession, we have only
| allowed the Fed to print more money, which hasn't turned
| out well. Instead of printing this money and raising
| asset prices, during each recession, fiscal policy should
| help increase the supply of things direly in need. If a
| recession is causing food shortages, we don't want
| printed money to increase demand for food. We would do
| much better by literally subsidizing X units of food for
| the next 1 year.
| WalterBright wrote:
| Government subsidy tends to attract a lot of malinvestment
| in order to get those dollars. For example, in Biden's
| bill, there's a subsidy for so-called "smart" glass that
| darkens when an electric current is applied. This is
| supposed to reduce solar input from windows by 20%.
|
| Of course, if this mattered, people would have already
| installed window blinds, which are cheap and easy. External
| eyebrows and eaves also work. "Smart" glass is an expensive
| solution, it's been around for 25 years, and nobody wants
| it.
| mattmoose21 wrote:
| Do you have a source for the smart glass subsidy? I
| haven't been able to find anything that mentions it.
| jsight wrote:
| https://www.prnewswire.com/news-releases/inflation-
| reduction... - It seems like it just puts it on an equal
| footing with other solutions.
|
| Unless there's a downside that I'm not aware of, that
| seems like a reasonable thing to do?
| WalterBright wrote:
| The downside is it is expensive, while much cheaper
| methods are available.
| mattmoose21 wrote:
| Yeah I don't see anyone taking advantage of this if they
| didn't also expect it to work.
| sbuttgereit wrote:
| https://www.axios.com/2022/08/30/smart-glass
|
| "Among the Inflation Reduction Act's little-noticed yet
| potentially game-changing provisions: a big incentive for
| "smart glass," which can make buildings significantly
| more energy efficient."
| mattmoose21 wrote:
| Thanks!
| adgjlsfhk1 wrote:
| One advantage of smart glass is you can get much better
| wavelength control. For example, you can reflect 90% of
| infrared light while letting through the visible light.
| This is really hard to do with a curtain.
| WalterBright wrote:
| If it's not worth the money for people to pay to get this
| feature, it is not worth paying for it with taxes.
|
| I've seen smart glass demoed at a home show 25 years ago.
| I thought it was way cool, until they quoted the price.
| It's no surprise it hasn't gotten any traction since. Oh,
| it also consumed electric power when in dark mode, as
| much as a light bulb. It's not a passive system.
|
| Window blinds, louvers, eyebrows, shades, etc., all work
| fine and are cheap.
|
| BTW, when I lived in Phoenix in the 1970s, people would
| tape aluminum foil or newspapers on the windows to cut
| the heat intake. The newspapers would block most of the
| solar heat, but would let the light through.
|
| Here in Seattle I made some reflective panels I can just
| stick on the windows when we have a heat wave. Plenty of
| light still gets in.
| mattmoose21 wrote:
| Would this product be aimed more at businesses and high-
| rises? Also this seems a bit more aesthetically pleasing
| than the alternatives and especially newspaper.
| WalterBright wrote:
| Just pointing out how cheap solutions can be.
| closeparen wrote:
| When rates rise in response to inflation, that's not a
| "meaningful" return you're getting, is it?
| de_Selby wrote:
| The point is that having near or below 0 rates has been a
| terrible policy for almost everyone, just as increasing
| them in response to inflation is going to hit most people
| hard now.
|
| A problem has been kicked down the road for years, it was
| always going to blow up in our faces.
| fny wrote:
| The current rate hikes are not due to inflation alone.
|
| IMO, Powell wanted to keep raising rates in 2018, but was
| hamstrung by Mnuchin and Trump who wanted to keep rates low
| and the dollar weak. The mini market panic at the time did
| not help. The COVID meltdown is why we went back to zero.
| Now he has the perfect excuse to return back things to a
| normal economic mode.
| JumpCrisscross wrote:
| > _we 've got to get them back somewhere near historic normals_
|
| Estimating the neutral interest rate, _i.e._ "the real (net of
| inflation) interest rate that supports the economy at full
| employment/maximum output while keeping inflation constant"
| [1], is closer to art than science. It's almost certainly not a
| simple historical average, particularly not in a dynamic
| economy.
| hot_gril wrote:
| Money-"printing" creates the need to stash money away, which
| leads to passive investing since most people who have savings
| aren't market experts, which leads to perpetual bubbles.
| There's no option to simply hold money. This investment at
| least tends to go into profitable things like stocks, but not
| in a proportionate way. It hardly matters how profitable a
| company is; you just expect the stock to go up regardless
| because people are parking money there.
|
| Basically, ridiculous startups and ridiculous corporate
| projects get funding when they shouldn't.
| hot_gril wrote:
| Oh and house prices in some places are ridiculous too, not in
| the whiny "I can't afford a house" way (I can) but just
| looking at the market. They have little to do with the actual
| utility you get out of home ownership, but that's ok because
| you're getting a growth asset under an effectively govt-
| subsidized loan. How can you tell, compare to rent, which is
| just the price of living.
| lamontcg wrote:
| This is going to generate a recession though which will drag
| down long interest rates, and they'll slash short rates in a
| panic and we're back at groundhog day again.
|
| If you want persistently higher long interest rates then you
| want persistently higher inflation expectations.
| sbaiddn wrote:
| This wont help inflation, interest rates are still effectively
| negative when inflation is considered.
|
| What it will do is rise i interest payments on the US sovereign
| debt very significantly.
|
| The US has two options, as far as I can tell.
|
| 1. Slash govt. spending (entitlements and defense) and rise taxes
| on the laptop class (that's us folks!)
|
| 2. Accept structural inflation and high interest rates.
|
| The Dollar dominance is coming to an end, we weaponized it too
| much, so option 3, exporting inflation is out.
|
| Politically 2 is easier, but in the long run disastrous.
| eftychis wrote:
| I am not even sure (1) is a practical option. Remember we have
| increased instability due to the Russo-Ukraine war. Thus, the
| U.S. Department of Defense is already getting and spending more
| money all while more money is spent on Ukraine aid -- which
| ends up in U.S. Defense industry hands. Entitlements not going
| to change, they should have but we are post pandemic, a lot of
| things are messy and we are in a midterm election season. And
| finally taxing the laptop class more might be politically taboo
| -- see midterm/future election note -- and improbable as a lot
| of shuffling has been taking place and over taxing might/will
| scar "unicorns and the VC" system way too much in the long run.
| Recall, you can't tax capital gains if there are no gains, but
| huge losses. And the laptop class taxation is based on capital
| gains I'd say.
|
| Option (3) is already in effect indirectly, due to inflation
| being world-wide, and Europe being hit much harder due to the
| conflict.
|
| Like every past pandemic this one is going to hit the economy
| like a sledgehammer... We failed, once again.
| jnwatson wrote:
| Raising interest rates makes the dollar _more_ attractive
| relative to other currencies, because receiving more interest
| is better than receiving less.
| Victerius wrote:
| The dollar survived the Great Depression, Bretton Woods, the
| oil supply shocks, the abolition of the gold standard,
| political games of brinkmanship over the debt ceiling, the War
| on Terror, the Great Financial Crisis, the Volcker shock, and
| Covid.
|
| The dollar's supremacy isn't going anywhere.
| curiousllama wrote:
| Wasn't it Bretton Woods that _established_ USD dominance?
| uptownfunk wrote:
| Agree if anything this will help the dollar supremacy and
| hurt the rest of the world.
| actusual wrote:
| Would appreciate some sources for these claims.
| norwalkbear wrote:
| Just more regular people about to be laid off and suffer.
| alecco wrote:
| @dang
|
| How is this entry about to leave the front page at 105 points and
| 154 comments and the CNBC one at 36 p 14 c rising? This is
| ridiculous. I'm not accusing of malice, but something needs
| fixing.
| dcdc123 wrote:
| Are rates for investment companies also affected by this? Like if
| a company wants to buy 30-50 houses to rent out, do they borrow
| at a similar rate?
| bombcar wrote:
| Almost all interest rates are affected by this, because almost
| all of them are "federal rate + X" - so if the fed rate floats
| up, so does the amount this company would pay.
| curiousllama wrote:
| > Are rates for investment companies also affected by this?
|
| Yes
|
| > Like if a company wants to buy 30-50 houses to rent out, do
| they borrow at a similar rate? [... to regular mortgage
| borrowers]
|
| Typically no
| JamesBarney wrote:
| And to expand on that, they usually borrow at a much higher
| rate than regular mortgage borrows.
| uptownfunk wrote:
| I wonder what behavioral effects will be as a result of this.
| I've definitely become more conscious of eating out to cut cost.
| I hear Americans want to travel after being muzzled for 2 years.
| I am looking for more economic places to live versus cushy Palo
| Alto. I think until houses adjust to where they're supposed to be
| (a la pre 2020 projected growth rates) vs the spike from pandemic
| Will be difficult for me to pull the trigger and buy a house
| donsupreme wrote:
| there is a whole generation of SWE who will face the reckoning
| that $400K total comp with RSU is far from the norm
| [deleted]
| mberning wrote:
| Something dramatic is going to have to happen for SWE salaries
| to drop significantly. I have a feeling if SWEs take a 20%+
| haircut on salaries things are going to be absolutely abysmal
| for people in other roles.
| jazzkingrt wrote:
| Many of us have already dealt with a 20% haircut, at least on
| the RSU portion of compensation.
|
| * Higher cost of borrowing is putting pressure on growth
| companies that relied on cheap capital
|
| * Economic downturn makes it harder to do business and lowers
| stock prices, which makes up a big part of any 400K SWE
| package
|
| * Tech companies can allow RSU grants to expire rather than
| implementing formal paycuts. Whereas companies in other
| sectors might lay off 5% of the workforce before giving
| everyone a 5% paycut, we may see a different trend in tech.
| digianarchist wrote:
| My RSUs are down 70% from their post IPO peak.
| 11101010001100 wrote:
| question: is it illegal to setup a hedging instrument for
| this sort of thing?
| jedberg wrote:
| It's illegal for officers and directors to short their
| own stock. It's not technically illegal for any other
| employee.
|
| That being said I've never seen a company that allows it
| in their company policy. Every company I've seen forbids
| it to eliminate the appearance of unethical behavior.
| digianarchist wrote:
| Illegal? Not sure. I'm forbidden from shorting our own
| stock by internal policy.
| curiousllama wrote:
| > I have a feeling if SWEs take a 20%+ haircut on salaries
| things are going to be absolutely abysmal for people in other
| roles.
|
| Other roles have more direct analogues in other industries
| that keep compensation stickier. Eg, corporate
| finance/strategy/legal/etc can just transition industries
| pretty cleanly, with similar comp. They get paid less in the
| good times, true, but if the downturn is concentrated in
| tech, other companies would still be happy to have them.
| throw_nbvc1234 wrote:
| What time scale are you thinking of? Short-term 20% haircut
| seems inevitable compared to 1-2 years ago with the caveat
| that nothing may be forcing you to sell any vested RSUs.
| paulpauper wrote:
| 10 year treasury bonds looking good or corporate bonds. You are
| locking in a 3-4% rate for the next decade. It will not take much
| to force interest rates and inflation back down again...another
| pandemic, recession, crisis, etc. Yes, 10-year bonds have a
| negative real yield now, but it seems unlikely inflation will
| stay at 5-8%/year for the next decade.
|
| The problem with cash is the ONLY way you are getting that 3%
| yield is if:
|
| 1. you stay in cash for a whole year , 2. and the fed does not
| lower rates again
|
| This is why bond ETFs have so much lag and are not as good. They
| still have old bonds on their book which pay worse, so you are
| getting maybe a 2% yield instead of 3%. You are better off just
| buying bonds from the treasury and getting the full amount.
| abm53 wrote:
| The "old bonds on their book" will decline in value if rates
| rise.
|
| Consequently the ETF will be cheaper by exactly the right
| amount to keep the income/coupon component of its return in
| line with buying an equivalent basket of US treasury bonds
| directly.
| clarkrinker wrote:
| I was wondering why they don't move the interest rate up
| continuously over a period instead of flat jumps. Is the shock of
| jumping up in one day useful economically? That would be slightly
| confusing, because it seems like I'm always reading that the
| market has already priced in changes to the interest rate by the
| time the announcement comes out.
| jpgvm wrote:
| It's a coarse enough instrument that changing it only a few
| times a year still spreads the effect out over the whole year
| and even if it was continuous announcing a change in the rate
| of change will have exactly the same effect.
| maxfurman wrote:
| They still need to price contracts between jumps. If they move
| it "continuously," then the rate at any given moment is
| difficult to determine. Hopefully no one is using javascript to
| calculate it!
| nonameiguess wrote:
| They actually do. The announcement is them saying what they
| target the rise to be. It may be slightly more or slightly less
| and it's not instantaneous. Direct lending to banks is an
| instrument available, but most of their influence comes from
| open market operations, which only indirectly impacts
| prevailing interest rates and consists of more or less
| continuous buying and selling of existing debt, which doesn't
| all happen on the day of the announcement.
| markus_zhang wrote:
| I'm wondering if they are going to bite the bullet and raise like
| Volcker.
|
| But again I realized that I actually do not understand the source
| of inflation and how much contribution each source has. We all
| know that the war, Covid and monetary policy are three sources
| but are there other structural sources? What about the trade
| quarrel between US and China? How much does it hurt for each
| industry?
|
| I should read some papers and talk to people in different
| industries to get some ideas.
| splitstud wrote:
| maxfurman wrote:
| My understanding is that the US has so much more debt now than
| we did in the 80s that a rate hike of that magnitude would
| cause too much harm for the Fed to stomach.
| JumpCrisscross wrote:
| > _the US has so much more debt now than we did in the 80s
| that a rate hike of that magnitude would cause too much harm
| for the Fed to stomach_
|
| The Treasury pays interest on government debt. The Fed does
| not. Raising rates causes the Fed no harm other than (a)
| risking recession and (b) creating accounting losses idiots
| politicise. (The same way the Fed's accounting gains as it
| lowered rates are a useful fiction.)
|
| When the Fed raises rates, it increases the rate the U.S.
| pays on new debt. Over time the U.S. government's interest
| outlay would thus rise. But we're nowhere near that being an
| issue. To the degree it _would_ be an issue, it would
| manifest as inflation. The specter rates are being raised to
| fight.
| bluGill wrote:
| > Raising rates causes the Fed no harm other than (a)
| risking recession and (b) creating accounting losses idiots
| politicise
|
| There is C: politics. It is believed that the Fed is
| directly responsible for Carter losing to Reagan. (though
| it isn't clear how the election would have gone otherwise,
| it wouldn't have been the landslide it was) The Fed also
| reports to congressional hearings.
| changoplatanero wrote:
| Harm to who? Aren't rate hikes beneficial to entities that
| have a lot of debt?
| xyzzyz wrote:
| To US government. It holds a lot of short term debt that it
| continuously rolls over into new short term debt. If the
| rate go up, new short term debt will become much more
| expensive to service.
|
| Here is a simple example with made up (but not completely
| off base) figures. Assume US government has debt amounting
| to 100% GDP. Assume also that it collects taxes amounting
| to 20% of GDP. If rates are 2%, then interest payments are
| 2% of GDP, which is 10% of the budget. Now, if bond rates
| go to, say, 6% (current mortgage rates), then interest
| payments are 6% of GDP, which is now actually 30% of the
| budget.
|
| Basically, at high debt-to-GDP ratio, small changes in the
| interest rates cause huge swings in how much budget is
| spent on interest payments. This money has to come from
| somewhere, and more debt is only a short term answer.
| mrgalaxy wrote:
| I'm no expert here, so someone by all means correct me, but
| my understanding is that the fed rate correlates to the
| rate of interest the government has to pay on its debts.
| The higher the rate, the larger the chance that the
| government defaults which for the US would be catastrophic.
| JamesBarney wrote:
| The US can't be forced to default. They can literally
| print money.
| bombcar wrote:
| https://www.crfb.org/blogs/just-how-big-are-federal-
| interest...
|
| > According to the Congressional Budget Office's (CBO)
| latest baseline, the federal government will spend $400
| billion on interest payments on the national debt this
| fiscal year (FY). That's equivalent to just over 8
| percent of all federal revenue collections and roughly
| $3,055 per household ... Interest costs and the national
| debt could be even higher if interest rates continue
| their upward trajectory and outperform CBO's latest
| economic forecast. Each one percentage point increase in
| interest rates would increase FY 2022 interest spending
| by $38 billion at today's debt levels.
|
| As the interest rate increases, those payments increase
| also - this is money that is spent and doesn't "get us
| anything more" - it's just maintaining the current debt
| load. The site linked is obviously arguing for "spend
| less money" but the math checks out, and if the debt
| never goes _down_ interest rates can have a major effect.
| (Now sure, some /most of this debt is paid to the
| government itself.)
| mrgalaxy wrote:
| Wow thanks putting a number on it. I knew it was high but
| holy cow is that a lot of money for as you say, nothing
| more.
| bombcar wrote:
| To be fair, there's an argument that it's effectively the
| same as the government _printing_ 400 billion a year, or
| something (this is MMT). I don 't fully follow the
| argument and honestly it's not something really
| actionable by me. Personally it's all too complicated for
| me to think about and any analogies are going to fall
| short in horrible and painful ways.
| olivermarks wrote:
| @mrgalaxy So long as the US onshore Dollar and offshore
| 'petrodollar' remain as the reserve currency of the
| planet default is unlikely as they essentially control
| all our planets money and can print more and more, or
| reduce money supply. It is good to be king.
| ceejayoz wrote:
| Not if it's variable debt, like credit card interest.
| bobthepanda wrote:
| The US rolls over debt by paying off debt with new debt. So
| interest rate hikes would eventually lead to a hike in
| interest payments on bonds.
|
| A sharp increase in bond interest payments set off the
| Greek crisis.
| BobbyJo wrote:
| Not if they can't pay it off, and need to roll over said
| debt, which is the case with the national debt.
| [deleted]
| notinfuriated wrote:
| Inflation is beneficial to entities with a lot of debt.
| Lowers what they have to pay back in real dollars.
| Nifty3929 wrote:
| Harm to the politicians that like to spend borrowed money.
| [Edit: Remember that the US debt is constantly being
| refinanced at new (now higher) rates] Also remember that
| debt reflects money ALREADY spent and which therefore
| provides no additional value, while the ongoing cost of
| servicing that debt will climb and capture an increasing
| proportion of the national budget. If all goes well, this
| will result in reduced spending - but that's not likely.
| More likely is that this leads to EVEN MORE borrowing,
| which in turn causes MORE inflation. If we don't get a
| grip, this is what ultimately ends in a hyper-inflation
| death spiral as we've seen in other countries over the last
| 100 years. As the pie shrinks, the govt tries to preserve
| the absolute size of it's slice by spending more, which
| causes the pie to shrink still further.
| dageshi wrote:
| Inflation was high for quite a number of years before volker,
| they kept raising rates but then backed off from the economic
| pain and never succeeded in killing it completely. Volker
| came in and raised rates to the point where inflation was
| done.
|
| The point being, they can try to kill it first time, or maybe
| they have to raise even higher later on which would be even
| worse for the problem you're talking about.
|
| Also, they're on record as being fully aware of this.
| notinfuriated wrote:
| Too much harm for the Federal government to stomach when
| interest payments surpass tax revenue. Either tax hikes or
| spending cuts would have to occur, or go further into debt to
| pay interest on debt (???)
| jhallenworld wrote:
| >I actually do not understand the source of inflation
|
| I think this is the source of the problem:
|
| https://www.bls.gov/charts/employment-situation/civilian-lab...
|
| Demand is coming from 100% of the population, but supply comes
| only from those who are working. Thanks to Covid, the supply of
| workers is less, but also there is a long term trend (maybe
| compensated for by productivity gains..)
|
| It's interesting to compare it with this one:
|
| https://www.bls.gov/charts/employment-situation/employment-p...
|
| This one shows the percent of people working of employment age.
| This doesn't look so bad, but the people not of employment age
| also create demand.
|
| IMHO, the only price that really matters is the cost of labor
| (no matter what they say). IMHO, because the value of money is
| defined by average annual salary (the real value is work, not
| money).
|
| https://fred.stlouisfed.org/series/CES0500000003
| lamontcg wrote:
| Retiring boomers and an aging population along with disability
| due to long COVID are leading to not enough workers. That is
| leading to wage inflation along with unionization since the
| workers currently are holding more of the cards.
|
| That is the bridge too far for the Fed so they're cracking down
| like Volker. They didn't care about housing prices, rents,
| college tuition, the commodities inflation in 2010-2014, etc.
| Normal jobs like working in a restaurant are seeing wage
| inflation now and that can't be tolerated.
| jpgvm wrote:
| The main source is definitely monetary policy, this was
| supremely obvious from the enormous asset bubble that ballooned
| out of the pandemic with risk-on assets like tech stocks and
| crypto exploding in valuation. The reason this happened is when
| interest rates are held at near zero then future profits are
| valued significantly higher (normally they are discounted by
| the interest rate, or more correctly the "risk free return" of
| US 10Y government bonds).
|
| It also manifested in higher savings balances etc.
|
| The main reason this happened was the Fed didn't trust the
| administration to deploy appropriate fiscal stimulus as in the
| past trying to rely on US politicians has been a poor choice.
| Unfortunately we ended up with both monetary policy and fiscal
| policy deployed at full ball. If we had seen a weaker or more
| targeted monetary policy that aimed to just unfreeze credit
| markets and have fiscal policies step up to handle depressed
| employment/industry shutdowns the fallout would have been
| significantly decreased.
|
| For instance China did cut rates and reduce the reserve
| requirement ratio (US also did this, it was essentially zero
| until start of 2022) they didn't get anywhere near that
| "essentially zero" rate that the US did. This means their
| domestic inflation remained manageable, most of their inflation
| is attributable to imported sources like energy and
| commodities. They instead pursued more targeted policies aimed
| at addressing specific industries and socioeconomic groups
| affected.
|
| So yeah, it still is a combination of things but monetary
| policy in the US had an outsized impact on inflation globally
| compared to circumstantial factors IMO.
| boringg wrote:
| After the election...
| dragontamer wrote:
| Powell is Trump's pick (1st term) AND Biden's pick (2nd term)
| with like 89 votes from the Senate.
|
| For better or worse, the man and his circumstances has proven
| himself to be apolitical.
| boringg wrote:
| He's done fairly well at navigating the political landscape
| I would say that he's smart enough to know that if he does
| anything strongly before the election it will be
| scrutinized heavily as political thus he will wait until
| after the election if he deems it necessary to make more
| drastic measures.
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