7 ms·

It will be very interesting how this plays out. We are in rather unexplored territory. On one hand raising interest rates could spook the stock market which wou

by spikels 11y ago

It will be very interesting how this plays out. We are in rather unexplored territory. On one hand raising interest rates could spook the stock market which would reverberate through tech. On the other hand without room to lower rates the Fed would be without it's best tool when the inevitable next recession arrives. Seems like slowly raising rates is the best course.

hibikir 11y ago
What is interesting about this whole thing is precisely the second point: Are interest rates really the best tool to alter monetary policy? What's the real transmission mechanism by which anything the fed does affect the economy. The view I'd most like tested is Scott Sumner's, who thinks that there's no such thing as running out of ammunition while trying to provide monetary stimulus: If a central bank wants to create inflation, all they had to do is print money and actively spend it, buying bonds, stocks, anything. It's not what a majority of economists believe, but at the same time, his model is very predictive. Unconventional monetary policy, like what Japan has been doing, has changed indicators in Japan in ways that decades of traditional intervention failed to do. Either way, there's been so much talk about rate raising, that unless we think markets are very bad at prediction, I'd be very surprised much changed in the market if rates moved up a quarter of a point: The uptick has been priced into the stock prices already. It'd be news if it didn't happen.
- toomuchtodo 11y ago
  I wouldn't say you'd want to throw printed money into any asset class; you're just going to create a bubble somewhere. I'd advocate for printing it and dropping it in everyone's checking account. It creates immediate economic activity by people who are going to go spend that money today.
  - shostack 11y ago
    Isn't that inevitable with any sort of plan to stimulate the economy? Seems like there will always be some sort of bubble(s), and that it is impossible to ever reach equilibrium or a smooth state.
    - AnimalMuppet 11y ago
      No. The Fed buying stocks and bonds doesn't increase the price of anything else very much. Not very many people buy cars because the stock market went up. But if you hand out money to actual people (basic income, maybe?), then some will pay down debt, and some will buy stuff, and some will do some of both. But those who buy stuff increase the demand for stuff, which means people have to make more stuff, which increases the number of jobs, which means that more people have money to spend, and hopefully the economy improves on a sustained (non-bubble) basis. (It also cuts down on the amount of bad debt, which is helpful to the economy as well.) The Fed buying stocks, on the other hand, does not increase jobs in any meaningful way. It just raises the prices of stocks. People with money then want to be in stocks, because the prices are going up. But they aren't buying stocks because the fundamentals are better; they're buying only because the price is going up. And their buying pushes the price up further, so more people see the price going up, so more people buy, and away we go. "Price going up disconnected from the fundamentals": that's a basic definition of a bubble. Add in the positive feedback loop of people wanting to buy because the price is going up, and it's definitely a bubble.
      - toomuchtodo 11y ago
        I'm very interested how bad the fallout is going to be on the S&P when the Fed ticks up interest rates. If today's market activity was any indicator, hold on tight.
        shostack 11y ago
        Seconding this, but for the Bay Area real estate market. My theory is that raising rates will reduce the number of people in the market because money won't be as cheap, however what I'm not sure of is the sheer massive amount of demand from people with money (investors and highly-paid techies) and whether it will be enough to cancel it out. As someone who bought earlier this year I guess I'll see. Sure as heck hope it keeps going up for a bit more.
        deleted 11y ago
Alupis 11y ago
They keep talking about raising rates based on the notion the markets and economy have more than fully recovered, which is not entirely true (we just didn't like the old metrics so we changed how we measure things)[1]. It feels dangerous to change rates based on flawed data points (and also makes the Fed Reserve look to be playing partisan politics to help spin the narrative of "everything's fine"). [1] http://www.huffingtonpost.com/2013/07/19/unemployment-rate-wrong_n_3619152.html http://www.huffingtonpost.com/2013/07/19/unemployment-rate-w...

by spikels 11y ago

hibikir 11y ago

What is interesting about this whole thing is precisely the second point: Are interest rates really the best tool to alter monetary policy? What's the real transmission mechanism by which anything the fed does affect the economy. The view I'd most like tested is Scott Sumner's, who thinks that there's no such thing as running out of ammunition while trying to provide monetary stimulus: If a central bank wants to create inflation, all they had to do is print money and actively spend it, buying bonds, stocks, anything. It's not what a majority of economists believe, but at the same time, his model is very predictive. Unconventional monetary policy, like what Japan has been doing, has changed indicators in Japan in ways that decades of traditional intervention failed to do. Either way, there's been so much talk about rate raising, that unless we think markets are very bad at prediction, I'd be very surprised much changed in the market if rates moved up a quarter of a point: The uptick has been priced into the stock prices already. It'd be news if it didn't happen.

toomuchtodo 11y ago
I wouldn't say you'd want to throw printed money into any asset class; you're just going to create a bubble somewhere. I'd advocate for printing it and dropping it in everyone's checking account. It creates immediate economic activity by people who are going to go spend that money today.
- shostack 11y ago
  Isn't that inevitable with any sort of plan to stimulate the economy? Seems like there will always be some sort of bubble(s), and that it is impossible to ever reach equilibrium or a smooth state.
  - AnimalMuppet 11y ago
    No. The Fed buying stocks and bonds doesn't increase the price of anything else very much. Not very many people buy cars because the stock market went up. But if you hand out money to actual people (basic income, maybe?), then some will pay down debt, and some will buy stuff, and some will do some of both. But those who buy stuff increase the demand for stuff, which means people have to make more stuff, which increases the number of jobs, which means that more people have money to spend, and hopefully the economy improves on a sustained (non-bubble) basis. (It also cuts down on the amount of bad debt, which is helpful to the economy as well.) The Fed buying stocks, on the other hand, does not increase jobs in any meaningful way. It just raises the prices of stocks. People with money then want to be in stocks, because the prices are going up. But they aren't buying stocks because the fundamentals are better; they're buying only because the price is going up. And their buying pushes the price up further, so more people see the price going up, so more people buy, and away we go. "Price going up disconnected from the fundamentals": that's a basic definition of a bubble. Add in the positive feedback loop of people wanting to buy because the price is going up, and it's definitely a bubble.
    - toomuchtodo 11y ago
      I'm very interested how bad the fallout is going to be on the S&P when the Fed ticks up interest rates. If today's market activity was any indicator, hold on tight.
      - shostack 11y ago
        Seconding this, but for the Bay Area real estate market. My theory is that raising rates will reduce the number of people in the market because money won't be as cheap, however what I'm not sure of is the sheer massive amount of demand from people with money (investors and highly-paid techies) and whether it will be enough to cancel it out. As someone who bought earlier this year I guess I'll see. Sure as heck hope it keeps going up for a bit more.
        deleted 11y ago

Alupis 11y ago

They keep talking about raising rates based on the notion the markets and economy have more than fully recovered, which is not entirely true (we just didn't like the old metrics so we changed how we measure things)[1]. It feels dangerous to change rates based on flawed data points (and also makes the Fed Reserve look to be playing partisan politics to help spin the narrative of "everything's fine"). [1] http://www.huffingtonpost.com/2013/07/19/unemployment-rate-wrong_n_3619152.html http://www.huffingtonpost.com/2013/07/19/unemployment-rate-w...