7 ms·

Fed rate hikes don't affect the US dollar the way we think

50 points by prostoalex 8y ago

CompelTechnic 8y ago
Imagine you are in an empty room with a digital screen on the wall. The screen says 76°F. Over the next few days, you feel the temperature drop and rise over time, and the value on the screen always changes accordingly. You know that the real temperature and the value on the display are related, but you do not know whether the display is a thermostat or a thermometer. Fed rate effects are difficult to measure for the same reason that the thermometer/thermostat problem exists. You cannot disambiguate cause from effect when monetary policy is used as a control system.
- grenoire 8y ago
  That is a case of correlation is not causation, and it's essentially one of the biggest problems faced by macroeconomists and policymakers alike (alongside... many other fields, of course). Unfortunately there's no way to determine causality without extensive experimentation, and more unfortunately monetary and fiscal policy do not allow for the same playgrounds that other fields have access to. We know certain policies work, but for those what's then missing is to what extent.
  - 0x8BADF00D 8y ago
    It is also hard to measure the value of a dollar. Since it is also the unit of account.
- pesmhey 8y ago
  That’s the academic paradigm. Now imagine if you had no control, as an individual, over the number you see. In that case, it is always a thermometer.
  - ComputerGuru 8y ago
    No, because a change on that display either precedes a change in temperature or lags behind one. A thermometer would strictly be the latter. That you have no control over it does not change the nature of what it is.
- coralreef 8y ago
  Generate heat by profusely working out (jumping jacks, running circles, shadow boxing, dancing). If the temperature goes up, you know its a thermometer. /s
benlorenzetti 8y ago
To HN: Is there a body of economic theory or a good text that separates inflation of the base currency from some other term that captures its relative value to other currencies?
- thaumasiotes 8y ago
  Currency inflation measures the value of currency relative to... everything. Inflation is a fall in the value of currency. Why do you want a special term for e.g. the dollar falling by 8% at the same time that the british pound also falls by 8% (in which case the value of one currency relative to the other doesn't change)?
- grenoire 8y ago
  Not entirely a direct relationship but often heavily related is the international Fisher effect (https://en.wikipedia.org/wiki/International_Fisher_effect https://en.wikipedia.org/wiki/International_Fisher_effect).
- T-A 8y ago
  Big topic with plenty of proposed answers, none of which works particularly well. There is a summary of common ones here: http://www.economicsdiscussion.net/foreign-exchange/theories-foreign-exchange/theories-of-exchange-rate-determination-international-economics/30637 http://www.economicsdiscussion.net/foreign-exchange/theories...
  - benlorenzetti 8y ago
    Thanks! To all the others too.
- andrewla 8y ago
  Sometimes "debasing" is used to describe the deliberate attempts to devalue money, either by printing more money, or, in earlier times, actually decreasing the amount of precious metals in favor of base metals in minted coins. There's not really a term for deliberate attempts to increase the value of the currency (as this is a policy goal not really pursued by modern central banks, as deflation is considered to be bad). Demurrage is a related concept, but rarely used in this sense.
rapsey 8y ago
Just printing money does not mean inflation is a result. For inflation to occur you also need money velocity. What the FED has done is print a whole lot of money, but that money has largely stayed within the big banks and wall street. Not as much has moved to the real economy because money velocity is low. Though inflation has picked up in the last few years. https://fred.stlouisfed.org/series/M2V https://fred.stlouisfed.org/series/M2V
- getcrunk 8y ago
  Can u justify your first scentence? In my head (did not study Econ) x is all the actual economic value in a country and it’s divided by the money supply. You increase the money supply in a fixed moment (print money) that ratio changes and stuff is worth less or costs more (inflation). So yea please explain how simply printing money doesn’t cause inflation
  - mikeash 8y ago
    Imagine I hijack a treasury printing press and print myself $10 trillion every year, but I just shove it all in a storage unit and never touch it. That won’t affect prices at all.
  - hyperpape 8y ago
    I'm sure there are better sources, but see: https://en.wikipedia.org/wiki/Money_supply#Link_with_inflation https://en.wikipedia.org/wiki/Money_supply#Link_with_inflati... The intuition is that if you hand me a bunch of cash, and I stash it in my mattress, there is no inflation until I begin to spend it.
  - setr 8y ago
    If I understood him correctly: if the money never actually moves, that is, enters the economy properly, then it’d have no effect on it. ie a savings account (to you, personally) is the same as never having received the money in the first place, until the day its spent. If you never spend it, then it may as well not existed. In the same fashion, the printing of money has no effect if no one ever sees it. The more people who deal with it, the larger an effect it will have
kaycebasques 8y ago
I was expecting more historical evidence to support this argument. I’m not saying I have an opinion on whether it’s wrong or right, but I would like to see how the dollar performed during previous rate hikes.
deleted 8y ago
[deleted]
geggam 8y ago
I think the scale of the fiat currency and economics in the US allows for sectors to fluctuate wildly without impacting others. I also think the current state of economics is a complete unknown to everyone who tries to influence it. Fortunes can be made and lost over things like bitcoin where chaos seems to be the main driver of value. Interesting times to say the least.
IAmGraydon 8y ago
The author doesn't seem to understand that currency moves are based on predicted future rates, not current rates. By time a rate change happens, it is often expected and the currency value rises (or falls) until the change is actually announced, at which point it can paradoxically drop (or climb) due to the market now predicting the next move. The change is said to be "priced in" when this happens. So what actually moves the currency values are the economic indicators upon which the Fed bases its rate decisions, not the rate decisions themselves (unless, of course, a rate decision is announced which is a complete surprise).
- mortehu 8y ago
  CME has a simple web tool to see the market’s expectations about future rates, for those interested: https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html https://www.cmegroup.com/trading/interest-rates/countdown-to... E.g. a September rate hike is expected with a 99.8% probability by the market. For December the probability is 79.8%.
nabla9 8y ago
The premise of this article does not make sense to me. Why would anyone think as the author does? Increasing rates is attempt to control price inflation, not to control exchange rates. There is a link but, it's not straight nor is it the most important factor. You should look at the balance on current account, and export and import price indexes, net investment flows etc.
jnordwick 8y ago
The supply-siders have been saying this since Reagan was in office. Jude Wanniski's wrote similar statements in his newsletters and book: "how do you expect to make something more valuable by making it more expensive" (the interest rate being the price of money). Looking at actual rates, not targets, the overnight target is a blunt instrument that doesn't always follow the target very well. And even when it does, the exchange rate relationship seems to take long vacations. Art Laffer had similar views IIRC from a paper he did looking at the trade-weak dollar connection.

50 points by prostoalex 8y ago

Imagine you are in an empty room with a digital screen on the wall. The screen says 76°F. Over the next few days, you feel the temperature drop and rise over time, and the value on the screen always changes accordingly. You know that the real temperature and the value on the display are related, but you do not know whether the display is a thermostat or a thermometer. Fed rate effects are difficult to measure for the same reason that the thermometer/thermostat problem exists. You cannot disambiguate cause from effect when monetary policy is used as a control system.

grenoire 8y ago
That is a case of correlation is not causation, and it's essentially one of the biggest problems faced by macroeconomists and policymakers alike (alongside... many other fields, of course). Unfortunately there's no way to determine causality without extensive experimentation, and more unfortunately monetary and fiscal policy do not allow for the same playgrounds that other fields have access to. We know certain policies work, but for those what's then missing is to what extent.
- 0x8BADF00D 8y ago
  It is also hard to measure the value of a dollar. Since it is also the unit of account.
pesmhey 8y ago
That’s the academic paradigm. Now imagine if you had no control, as an individual, over the number you see. In that case, it is always a thermometer.
- ComputerGuru 8y ago
  No, because a change on that display either precedes a change in temperature or lags behind one. A thermometer would strictly be the latter. That you have no control over it does not change the nature of what it is.
coralreef 8y ago
Generate heat by profusely working out (jumping jacks, running circles, shadow boxing, dancing). If the temperature goes up, you know its a thermometer. /s

benlorenzetti 8y ago

To HN: Is there a body of economic theory or a good text that separates inflation of the base currency from some other term that captures its relative value to other currencies?

thaumasiotes 8y ago
Currency inflation measures the value of currency relative to... everything. Inflation is a fall in the value of currency. Why do you want a special term for e.g. the dollar falling by 8% at the same time that the british pound also falls by 8% (in which case the value of one currency relative to the other doesn't change)?
grenoire 8y ago
Not entirely a direct relationship but often heavily related is the international Fisher effect (https://en.wikipedia.org/wiki/International_Fisher_effect https://en.wikipedia.org/wiki/International_Fisher_effect).
T-A 8y ago
Big topic with plenty of proposed answers, none of which works particularly well. There is a summary of common ones here: http://www.economicsdiscussion.net/foreign-exchange/theories-foreign-exchange/theories-of-exchange-rate-determination-international-economics/30637 http://www.economicsdiscussion.net/foreign-exchange/theories...
- benlorenzetti 8y ago
  Thanks! To all the others too.
andrewla 8y ago
Sometimes "debasing" is used to describe the deliberate attempts to devalue money, either by printing more money, or, in earlier times, actually decreasing the amount of precious metals in favor of base metals in minted coins. There's not really a term for deliberate attempts to increase the value of the currency (as this is a policy goal not really pursued by modern central banks, as deflation is considered to be bad). Demurrage is a related concept, but rarely used in this sense.

rapsey 8y ago

Just printing money does not mean inflation is a result. For inflation to occur you also need money velocity. What the FED has done is print a whole lot of money, but that money has largely stayed within the big banks and wall street. Not as much has moved to the real economy because money velocity is low. Though inflation has picked up in the last few years. https://fred.stlouisfed.org/series/M2V https://fred.stlouisfed.org/series/M2V

getcrunk 8y ago
Can u justify your first scentence? In my head (did not study Econ) x is all the actual economic value in a country and it’s divided by the money supply. You increase the money supply in a fixed moment (print money) that ratio changes and stuff is worth less or costs more (inflation). So yea please explain how simply printing money doesn’t cause inflation
- mikeash 8y ago
  Imagine I hijack a treasury printing press and print myself $10 trillion every year, but I just shove it all in a storage unit and never touch it. That won’t affect prices at all.
- hyperpape 8y ago
  I'm sure there are better sources, but see: https://en.wikipedia.org/wiki/Money_supply#Link_with_inflation https://en.wikipedia.org/wiki/Money_supply#Link_with_inflati... The intuition is that if you hand me a bunch of cash, and I stash it in my mattress, there is no inflation until I begin to spend it.
- setr 8y ago
  If I understood him correctly: if the money never actually moves, that is, enters the economy properly, then it’d have no effect on it. ie a savings account (to you, personally) is the same as never having received the money in the first place, until the day its spent. If you never spend it, then it may as well not existed. In the same fashion, the printing of money has no effect if no one ever sees it. The more people who deal with it, the larger an effect it will have

kaycebasques 8y ago

I was expecting more historical evidence to support this argument. I’m not saying I have an opinion on whether it’s wrong or right, but I would like to see how the dollar performed during previous rate hikes.

deleted 8y ago

[deleted]

geggam 8y ago

I think the scale of the fiat currency and economics in the US allows for sectors to fluctuate wildly without impacting others. I also think the current state of economics is a complete unknown to everyone who tries to influence it. Fortunes can be made and lost over things like bitcoin where chaos seems to be the main driver of value. Interesting times to say the least.

IAmGraydon 8y ago

The author doesn't seem to understand that currency moves are based on predicted future rates, not current rates. By time a rate change happens, it is often expected and the currency value rises (or falls) until the change is actually announced, at which point it can paradoxically drop (or climb) due to the market now predicting the next move. The change is said to be "priced in" when this happens. So what actually moves the currency values are the economic indicators upon which the Fed bases its rate decisions, not the rate decisions themselves (unless, of course, a rate decision is announced which is a complete surprise).

mortehu 8y ago
CME has a simple web tool to see the market’s expectations about future rates, for those interested: https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html https://www.cmegroup.com/trading/interest-rates/countdown-to... E.g. a September rate hike is expected with a 99.8% probability by the market. For December the probability is 79.8%.

nabla9 8y ago

The premise of this article does not make sense to me. Why would anyone think as the author does? Increasing rates is attempt to control price inflation, not to control exchange rates. There is a link but, it's not straight nor is it the most important factor. You should look at the balance on current account, and export and import price indexes, net investment flows etc.

jnordwick 8y ago

The supply-siders have been saying this since Reagan was in office. Jude Wanniski's wrote similar statements in his newsletters and book: "how do you expect to make something more valuable by making it more expensive" (the interest rate being the price of money). Looking at actual rates, not targets, the overnight target is a blunt instrument that doesn't always follow the target very well. And even when it does, the exchange rate relationship seems to take long vacations. Art Laffer had similar views IIRC from a paper he did looking at the trade-weak dollar connection.