6 ms·

the problem is that if inflation continues, then interest rates will go up, whether the fed wants them to or not...once rates go up, money will flow from asset

the problem is that if inflation continues, then interest rates will go up, whether the fed wants them to or not...once rates go up, money will flow from asset investment to bonds etc...and that will crash asset prices...checkmate...one way or another, asset prices WILL crash

listenallyall 5y ago
That's assuming a free market with true price discovery. In reality, we have the Fed buying up financial assets and printing enormous amounts of money, and bailing out companies (which reduces risk, keeping rates low)... the entire thing is specifically engineered to AVOID true price discovery.
- imtringued 5y ago
  There is no such thing as a global free market with true price discovery in the real world. Foreign markets exist and you can't control them. They also tend to do insane things like selling products to you for money while lending the money back which drives the velocity of money down while simultaneously fueling speculative bubbles. Whatever the Fed is doing is just a side effect of things that happen in the global economy. It has more to go with globalization and China than the US economy.
uejfiweun 5y ago
How exactly does this work? I thought that the fed controlled interest rates. Under what circumstances could the interest rate rise independently of the fed?
- naveen99 5y ago
  Fed controls only nominal interest rates on treasuries. The real / effective rate is set by the market at auction by adjusting the price on the bonds.
  - bradleyjg 5y ago
    That’s the old world. Now the Fed buys unlimited amount of any securities it cares to. So it can manipulate all interest rates.
    - nostrademons 5y ago
      Eventual outcome is the same though. Firms lose confidence in the currency and stop accepting it, and then its value falls to zero. You can say a dollar is worth whatever you want, but unless people believe you, it doesn't matter.
  - User23 5y ago
    No, no it's not. USD denominated interest rates are whatever the Fed wants them to be. The Fed controls the entire USD yield curve, although that control does weaken a little as maturity goes out into the future, but not more than about 10%. Treasury auctions are kabuki theater[1]. Thanks to the Primary Dealer system it's impossible for an auction to fail. While the nominal rate may bounce around a few basis points, at the end of the day the Fed absolutely controls rates. They will literally create reserves and lend them to primary dealers at whatever rate is necessary to assure Treasury sells as many securities as it needs to at something near the target rate. [1] Yes, that does imply artfulness.
    - m348e912 5y ago
      Makes you wonder if there could be a scenario where the Fed raises rates for interbank lending and for loans to the general public but maintains a near zero percent interest rate on its own debts. As far I can tell the Fed operates with impunity and can do whatever it wants. So why not stave off inflation while protecting itself at the same time.
    - mountainb 5y ago
      Typically when weaker countries do this, it was once considered a sign of fundamental weakness and a sure sign that a currency crisis was imminent. The US abandoned the same principles in government finance that it once advanced through institutions like the IMF. It's not that it was bad advice; we see the results of the irresponsibility in today's markets. The US is just a big bad 'basket case' without much in the way of financial credibility past what it can dictate through market manipulation.
- hanoz 5y ago
  At the end of the day, money is stored work. If your country is running a deficit, living beyond its means, then you're dependent on other people's work now, on the promise of returning the favour later. If it starts to look like you're not going honour that, then suddenly you have to face the shock of living within your means, and no amount of printing new money is going to relieve you of that. If you can't live within your means, i.e. reduce the deficit to zero, you're going to have to start promising at lot more work in return, for the shortfall you have now.
- throwaway9870 5y ago
  When the exchange rates go crazy because nobody wants dollars. That being said, the USD is the key currency of the world so we have been able to avoid that issue. If the US causes the world to look away from the USD, it is game over for the US lifestyle. Screwing the rest of the world by printing USD is a bit like the Norway oil fund - it is an amazing source of wealth that will not last forever and should be spent wisely. The US is doing anything but that.
- refurb 5y ago
  Not an expert, but the central bank can set the interbank loan rate (rate at which banks loan money to each other overnight). But for things like mortgages, personal loans, corporate bonds, those are not control by the fed and rates are set through auctions. Of course, the fed controls the money supply so can signal whether they will increase or decrease it, so the rates set at auctions are influenced by what people think the feds will do.
- imtringued 5y ago
  If the demand for labor exceeds the supply of labor inflation goes up which also means interest rates must go up. The Fed exists to moderate inflation down to a 2% inflation goal. When you consider that inflation had been below target for a number of years with no way to increase it, it only makes sense to let it run wild for a bit and then reign it in.
88913527 5y ago
Is this so? The price of other assets going up doesn't change the riskiness of the bank's ability to repossess a home, in the chance the borrower becomes delinquent. You're borrowing money for a physical, durable thing in which the bank retains the deed until the debt is paid off. If the benchmark rate remains low, it's hard to imagine mortgage rates going up due to exogenous factors, or you would have expected us to see that in the past 50 years. https://fred.stlouisfed.org/graph/?g=ITPc https://fred.stlouisfed.org/graph/?g=ITPc

listenallyall 5y ago

That's assuming a free market with true price discovery. In reality, we have the Fed buying up financial assets and printing enormous amounts of money, and bailing out companies (which reduces risk, keeping rates low)... the entire thing is specifically engineered to AVOID true price discovery.

imtringued 5y ago
There is no such thing as a global free market with true price discovery in the real world. Foreign markets exist and you can't control them. They also tend to do insane things like selling products to you for money while lending the money back which drives the velocity of money down while simultaneously fueling speculative bubbles. Whatever the Fed is doing is just a side effect of things that happen in the global economy. It has more to go with globalization and China than the US economy.

uejfiweun 5y ago

How exactly does this work? I thought that the fed controlled interest rates. Under what circumstances could the interest rate rise independently of the fed?

naveen99 5y ago
Fed controls only nominal interest rates on treasuries. The real / effective rate is set by the market at auction by adjusting the price on the bonds.
- bradleyjg 5y ago
  That’s the old world. Now the Fed buys unlimited amount of any securities it cares to. So it can manipulate all interest rates.
  - nostrademons 5y ago
    Eventual outcome is the same though. Firms lose confidence in the currency and stop accepting it, and then its value falls to zero. You can say a dollar is worth whatever you want, but unless people believe you, it doesn't matter.
- User23 5y ago
  No, no it's not. USD denominated interest rates are whatever the Fed wants them to be. The Fed controls the entire USD yield curve, although that control does weaken a little as maturity goes out into the future, but not more than about 10%. Treasury auctions are kabuki theater[1]. Thanks to the Primary Dealer system it's impossible for an auction to fail. While the nominal rate may bounce around a few basis points, at the end of the day the Fed absolutely controls rates. They will literally create reserves and lend them to primary dealers at whatever rate is necessary to assure Treasury sells as many securities as it needs to at something near the target rate. [1] Yes, that does imply artfulness.
  - m348e912 5y ago
    Makes you wonder if there could be a scenario where the Fed raises rates for interbank lending and for loans to the general public but maintains a near zero percent interest rate on its own debts. As far I can tell the Fed operates with impunity and can do whatever it wants. So why not stave off inflation while protecting itself at the same time.
  - mountainb 5y ago
    Typically when weaker countries do this, it was once considered a sign of fundamental weakness and a sure sign that a currency crisis was imminent. The US abandoned the same principles in government finance that it once advanced through institutions like the IMF. It's not that it was bad advice; we see the results of the irresponsibility in today's markets. The US is just a big bad 'basket case' without much in the way of financial credibility past what it can dictate through market manipulation.
hanoz 5y ago
At the end of the day, money is stored work. If your country is running a deficit, living beyond its means, then you're dependent on other people's work now, on the promise of returning the favour later. If it starts to look like you're not going honour that, then suddenly you have to face the shock of living within your means, and no amount of printing new money is going to relieve you of that. If you can't live within your means, i.e. reduce the deficit to zero, you're going to have to start promising at lot more work in return, for the shortfall you have now.
throwaway9870 5y ago
When the exchange rates go crazy because nobody wants dollars. That being said, the USD is the key currency of the world so we have been able to avoid that issue. If the US causes the world to look away from the USD, it is game over for the US lifestyle. Screwing the rest of the world by printing USD is a bit like the Norway oil fund - it is an amazing source of wealth that will not last forever and should be spent wisely. The US is doing anything but that.
refurb 5y ago
Not an expert, but the central bank can set the interbank loan rate (rate at which banks loan money to each other overnight). But for things like mortgages, personal loans, corporate bonds, those are not control by the fed and rates are set through auctions. Of course, the fed controls the money supply so can signal whether they will increase or decrease it, so the rates set at auctions are influenced by what people think the feds will do.
imtringued 5y ago
If the demand for labor exceeds the supply of labor inflation goes up which also means interest rates must go up. The Fed exists to moderate inflation down to a 2% inflation goal. When you consider that inflation had been below target for a number of years with no way to increase it, it only makes sense to let it run wild for a bit and then reign it in.

88913527 5y ago

Is this so? The price of other assets going up doesn't change the riskiness of the bank's ability to repossess a home, in the chance the borrower becomes delinquent. You're borrowing money for a physical, durable thing in which the bank retains the deed until the debt is paid off. If the benchmark rate remains low, it's hard to imagine mortgage rates going up due to exogenous factors, or you would have expected us to see that in the past 50 years. https://fred.stlouisfed.org/graph/?g=ITPc https://fred.stlouisfed.org/graph/?g=ITPc