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The Fed doesn't have a target interest rate, they have a target inflation rate -- and the current policy has not been causing inflation -- so by all measures th
by nostromo 7y ago
The Fed doesn't have a target interest rate, they have a target inflation rate -- and the current policy has not been causing inflation -- so by all measures they've been successful at doing exactly what they're supposed to be doing: helping the economy grow without creating high inflation.
I notice that goldbugs in particular get very upset about low interest rates -- as if there is something "natural" or "normal" about 7% vs 3%. But there is no magical number -- if you can create wealth without inflation, you should obviously continue to create wealth.
Also, the government doesn't owe you a risk-free return of 7%. In theory, the risk-free return should be equal to the rate of inflation -- nothing ventured nothing gained.
- rm445 7y agoYes, if you measure inflation as a basket of consumer goods, you can pat yourself on the back doubly for having an asset bubble at the same time as "low" inflation. Nice that the population can still afford bread and eggs, not so nice that the prices of property, artwork and the like disappear into the stratosphere far beyond their reach.
- nostromo 7y agoHousing nationwide isn't actually that expensive: https://fred.stlouisfed.org/series/USSTHPI https://fred.stlouisfed.org/series/USSTHPI Remember: the Fed governs the entire US economy, not just San Francisco and Seattle like HN would prefer.
- sfkdjf9j3j 7y agoThe vast majority of people live in, and the vast majority of economic activity takes place in, major urban areas. So yeah, housing inflation is very relevant.
- nostromo 7y agoAnd all of those sales are included in the link I provided, which shows that housing has gone up 13% nationwide since the peak twelve years ago.
- YeahSureWhyNot 7y agoconsidering the fact that in all metro areas housing prices have almost doubled, I'm curious in which parts of the country the housing prices decreased by half to reach the 13% average increase
- sbjustin 7y agoWashington DC has for one not doubled. I'm not sure you're statement is accurate.
- runT1ME 7y agoHousing going up 13% means most homeowners made over 60% return on their money.
- refurb 7y agoThere are plenty of urban areas that haven't seen drastic increases in home prices.
- lettergram 7y agoSome have even seen a decrease. Chicago has just made it back to peak 2008 level: https://www.trulia.com/real_estate/Chicago-Illinois/market-trends/ https://www.trulia.com/real_estate/Chicago-Illinois/market-t...
- CalRobert 7y agoDo you have this as a function of median income and commute time? (I.e. housing within 30 minutes of jobs paying x)? Almost every time I see a decent non-remote job it's in an expensive city.
- hyperpape 7y agoI'm 10-15 minutes outside of Raleigh. I have a 22-35 minute commute (depending on time of day and traffic). I bought a house for something like 300-350% of a junior dev's annual salary in 2013, and from what I can tell, could do the same today (both house prices and junior salaries have increased). (Note: I am in Garner, which is a less affluent town, but hardly a bad place to live).
- CalRobert 7y agoThanks - appreciate the data point. I just bought a house for about 0.8x a mid-career dev's annual salary, but worked really hard to find it (I'll be about 1.2x once I get it finished and rethatched, which is part of why it was cheap) But I work remote and it's a risk to leave the city - growing up in northern California the idea of owning a home without an enormous amount of debt (and thereby meaning I had to decide to maximize income whether it meant doing what I wanted) was foreign.
- nradov 7y agoHow do you define a "decent" job? If you're a nurse you can probably find a decent job most anywhere. If you're a software developer then your options may be more limited.
- somethoughts 7y agoI think that's the challenge. The CPI where people need/want to live is actually quite high. California Urban Inflation http://www.dof.ca.gov/Forecasting/Economics/Indicators/Inflation/ http://www.dof.ca.gov/Forecasting/Economics/Indicators/Infla... You can see average inflation averages about 4% for LA, San Diego and San Francisco. I believe the St Louis FRED also has these inflation numbers for West Coast Urban CPI which reflect similar rates.
- golemiprague 7y agoCalifornia has many other issues impacting housing costs and I am not sure interest rate is the main one
- AmericanChopper 7y agoAlso keep in mind that housing prices in those areas are not forced up by oversupply of capital. Those areas have the highest demand for housing in the world, and draconian zoning laws that ensure supply will never be able to keep up. The Fed would have to be insane to set interest rates tailored to SF housing prices.
- Gibbon1 7y ago> Housing nationwide isn't actually that expensive: Now I'm interested in seeing the current metric of home prices divided by median income. Hmm... once source is this. https://www.longtermtrends.net/home-price-median-annual-income-ratio/ https://www.longtermtrends.net/home-price-median-annual-inco... Would be also interesting to see this as a heat map. > Remember: the Fed governs the entire US economy, not just San Francisco and Seattle like HN would prefer. Reports from the field, meaning friends with family in the rest of the country makes it sound like the Fed is doing even worse in those places.
- wwweston 7y agoUpvoted for the point that how inflation is measured matters a good deal to any discussion of whether fed policies of managing it are good for society as a whole. But... a picture of specific problems with the measure the fed uses (PCE, apparently) would be better than vaguely implying it's bad. Apparently it does include housing expenses, medical care, education, and even recreation, so it's not clear it's just "a basket of consumer goods." https://en.wikipedia.org/wiki/Personal_consumption_expenditures_price_index https://en.wikipedia.org/wiki/Personal_consumption_expenditu...
- lumost 7y agoLooking at housing costs without considering current price e.g. ( rental equivalent ) is a tricky business as it will lag current conditions by decades as a relatively small portion of the population pays current prices.
- deleted 7y ago[deleted]
- nradov 7y agoProperty is an investment, not a consumer expense. Outside of a few limited areas there is plenty of rental housing available, and rents are fully included in the CPI calculation.
- supercanuck 7y agoThat is a problem of fiscal policy (Congress) not a problem for the Fed (Monetary Policy)
- robertAngst 7y agoOkay, but what happens when it gets below 0% with QE5? Thats when Bitcoin hits 6 figures, or thats what the libertarian in me has been saying for a decade.
- defertoreptar 7y agoThe problem is that we're not leaving ourselves options for when things inevitably go bad. We need to unwind the balance sheet while it's possible, because otherwise we won't be able to deal with another 2008 the way we did.
- nostromo 7y agoThe balance sheet is (slowly) normalizing though. It's being reduced by about half a trillion a year, and that program will continue, regardless of interest rate changes. https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
- existencebox 7y agoThis is incorrect. The fed announced a halt of their divestment when signs of instability began showing over the end of '18 into '19. [0] (Edit: I wanted to reconcile why your chart was still trending down; the halt starts in September. [2]) The lowering of rates now coupled with balance sheet stabilization, during the longest expansion, prior to any REAL sign of economic turmoil (backed by Powell's own statements earlier this year when he was advocating "patience", the fundamentals have not changed substantially since then although his tune has) is to many a bad sign that the fed is being driven by political/wall street forces to keep the party going despite losing leverage down the road and promoting asset inflation. (Housing is often discussed but to avoid the inevitable rebuttals to that, I'd also cite the average PE ratio [1] being far above the historical average.) [0]https://www.reuters.com/article/us-usa-fed-powell/fed-to-stop-shrinking-portfolio-this-year-powell-says-idUSKCN1QG21I https://www.reuters.com/article/us-usa-fed-powell/fed-to-sto... [1] https://www.multpl.com/s-p-500-pe-ratio https://www.multpl.com/s-p-500-pe-ratio [2] https://www.reuters.com/article/us-usa-fed-balancesheet/fed-announces-plan-to-end-balance-sheet-runoff-in-september-idUSKCN1R12QA https://www.reuters.com/article/us-usa-fed-balancesheet/fed-...
- thorwasdfasdf 7y agoThe issue is, government is subsidizing Risk with Tax paying dollars. By handing out money for free (0% interest rates), they're increasing systemic risk. If something terrible happens like it did in 2008, tax payers are on the hook, to the tune of trillions of dollars.
- ikeboy 7y agoYou've got that exactly backwards. In theory, the risk free return should be equal to negative the rate of inflation. See https://en.wikipedia.org/wiki/Friedman_rule https://en.wikipedia.org/wiki/Friedman_rule
- mindslight 7y agoThe effect that is being suppressed is the natural deflation of manufactured and technological goods. A new manufacturer, or really any new vendor, wins marketshare by doing more for less. And computing power gets cheaper analogously to Moore's law (as we all instinctively know). So in a steady state economy (no resource shocks/depletion, etc), we should expect to see continuous natural deflation due to the progress that we are all working to create. But yet the Fed insists on targeting price inflation, to keep workers from directly seeing those gains! This played out quite nastily in regards to consumer goods. Walmart et al came to town, promising low prices based on foreign production and domestic economies of scale. But they destroyed local towns' commercial economies, putting many people out of stable living-wage work. Economic orthodoxy would expect the remaining local economy to cope by providing the still-employed more purchasing power (say, dual income families being able to drop to single income, now-richer still-employed people hiring household help, etc). But any lower prices were only temporary due to that policy of forced inflation, and everybody kept needing the same level of income. So the net result of that innovation ended up being to lower the standard of living with lower income and poorer quality goods. (Then along came heroin from Afghanistan, but I digress).
- conanbatt 7y ago> In theory, the risk-free return should be equal to the rate of inflation -- nothing ventured nothing gained. The rate of return is the opportunity cost of capital. As long as you have economic growth there will be an interest rate. When the government puts an interest rate below the natural rate it is making the machine work harder, but not necessarily better. It gives people that have access to the natural rate of return an above-natural return.