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I would love to understand why the fed hasn't increased interest rates to counter the rapid increase of inflation..? I remember learning some basic economics i

I would love to understand why the fed hasn't increased interest rates to counter the rapid increase of inflation..? I remember learning some basic economics in 2019 about how the U.S. learned a valuable lesson from 2008. How they will never make the same mistakes of letting inflation go unchecked because they have tools to work against it. Yet inflation has rapidly scaled to 6.8% (reported). Also, I am keeping supply chain demand in mind but I don't think it excuses the fed's decision to not immediately start curbing high inflation rates. My guess is that people with money are profiting and want to continue profiting until it is no longer sustainable.

anm89 5y ago
Because half of US companies and the US government itself as long as basically every pension and retirement fund are levered up either directly or indirectly to their eyeballs in cheap debt. Our entire system would quickly be insolvent at a rate that would have seemed low 20 years ago.
myth_drannon 5y ago
Housing and Stock market bubbles will implode.
- voxadam 5y ago
  If they're bubbles aren't they going to implode regardless?
  - xwdv 5y ago
    Bubbles don’t have to implode. They can just reach a point where there’s a long consolidation and things are sideways until reality fully rationalizes the bubble and it shrinks. This happens all the time with stocks. A stock could get very bubbly and reach an insane valuation to the point people think it will pop! But then it never does, instead it just stops rising and the underlying company eventually catches up to the valuation, until people think it’s a good buy again and start pumping the price even higher to the next leg up. Eventually the stock can never truly pop and go back to the pre-bubble levels because in the time that has passed the company actually did become more valuable.
sealthedeal 5y ago
They cant raise interest rates. If they do it will be nominal. We have too much debt. If we raise interest rates we will bankrupt ourselves. Inflation helps us chip away at the debt .
- deleted 5y ago
  [deleted]
SubiculumCode 5y ago
Lesson learned from 2008 was not fear ofinflation, it was fear of not injecting adequate money into a market after a downturn. I don't know what you're talking about.
neffy 5y ago
It won't stop the inflation. When inflation is due to printing money, the only thing that can be done is to sit back and wait for it to work it's way through the system. All raising interest rates would do is trigger a rerun of the Savings and Loan Crisis, as the huge quantity of long term, fixed rate, low interest rate loans, is suddenly devalued by short term, high interest rate loans. (Which is probably going to happen anyway, because Central Bank control over interest rates can be more than slightly illusionary at times like this. (Lenders can work out inflationary devaluation rates just as well as anybody else can.) 2008 was a very different scenario, the money that was printed then was forced into a narrow loop within the financial system and just used to sanitise a lot of bad debt away from the banking system. In some sense, the eventual logic of the last 20 years of massive increases in the total amount of debt circulating, due to loan securitisation, was that that debt would have to be devalued to make it repayable. And here we are.
- voisin 5y ago
  > When inflation is due to printing money, the only thing that can be done is to sit back and wait for it to work it's way through the system. Source? This doesn’t seem right to me at all.
  - deleted 5y ago
    [deleted]
  - samspenc 5y ago
    I suspect there is no source for this, but OP is just summarizing what the Fed is hoping will happen -- basically they have printed too much money but they don't want to raise interest rates either, so they are just going to sit back and wait for the excess money to flow through the system.
- jonnycomputer 5y ago
  https://econbrowser.com/archives/2021/11/so-you-want-to-be-a-monetarist https://econbrowser.com/archives/2021/11/so-you-want-to-be-a...
- XIVMagnus 5y ago
sleepysysadmin 5y ago
>I would love to understand why the fed hasn't increased interest rates to counter the rapid increase of inflation..? Collapse of the underlying assets that they hold. Bailing out the housing market during the pandemic means the fed holds lots of housing market. The theory is that they will let the assets mature and then pull the money back out to come back to a balance. I'll tell you now, if you believe that's about to happen I've got a bridge to sell you. The US still hadn't done this the day before covid started. Covid is far worse. >I remember learning some basic economics in 2019 about how the U.S. learned a valuable lesson from 2008. The irony is that the financial crisis at least help the USA today. Compare this to other countries like Canada and we are far worse off than the USA during the financial crisis. >How they will never make the same mistakes of letting inflation go unchecked because they have tools to work against it. Those tools are maxed out. > Yet inflation has rapidly scaled to 6.8% (reported). The fed made the claim that they would run inflation hotter because they didnt hit target of 2% during covid. The problem? They had to act by now. They've past that threshold of coming to parity. >Also, I am keeping supply chain demand in mind but I don't think it excuses the fed's decision to not immediately start curbing high inflation rates. My guess is that people with money are profiting and want to continue profiting until it is no longer sustainable. The metric to look at was GDP. When GDP was 6.7%, inflation was at 5.4% or so. The big problem is that gdp dropped to 2.1% and recession metrics spiked. If the fed increases rates while gdp is dropping. recession is certain. It's too late for them to undo what they did bailing out the housing market. It would seem counterproductive to spend all this money to prevent housing from crashing just to let it crash anyway. So we're stuck. Inflation is going sky high. It looks to be about 40% locked in right now over the next few years. You thought minimum wage wasnt keeping up? This is literally everyone except the rich getting much poorer soon.
- XIVMagnus 5y ago
  Thanks a lot for the explanation! I greatly appreciate you taking the time to break things down for me.
  - sleepysysadmin 5y ago
    >Thanks a lot for the explanation! I greatly appreciate you taking the time to break things down for me. It's a super complex issue that even the Fed probably has yet to understand. So I certainly don't as well. Many consequences could happen instead. Flipside, what just happened? The government effectively owns a huge portion of land again. Sure someone else is holding the title but really the government owns it. The banks/funds sold it to the government because they know they dont want to hold it. What does communism look like? The government owns everything.
drdec 5y ago
> I would love to understand why the fed hasn't increased interest rates to counter the rapid increase of inflation..? One reason is that they are still purchasing assets in order to goose the economy. It doesn't make any sense to be revving the economy with one hand while tamping it down with the other plus the point of the buying is to artificially depress interest rates. IIRC at the last meeting they announced that they would accelerate the tapering down of asset purchases so that they would be done in March. They also like to move slowly which is why they don't just halt the asset purchases and start raising rates. They treat the economy with kid gloves so they don't break it (right or wrong, for better or for worse, that's how it goes).
pjc50 5y ago
Well, they've written their reasons down: https://www.cnbc.com/2021/10/19/federal-reserve-powells-5-key-inflation-criteria-arent-holding-up-well.html https://www.cnbc.com/2021/10/19/federal-reserve-powells-5-ke... Basically they can only control inflation in the future, and they believe the inflation we've just seen is a result of the one-off of the pandemic response. Given that the interest rate mechanism affects inflation by increasing unemployment and harming the economy, they don't want to do that until it's necessary. (I should note that it's theoretically possible to do inflation control by fiscal policy, i.e. mop up some of the spare money by taxation, but that's obviously not going to happen)
- dantheman 5y ago
  Probably better to just reduce government spending than increase taxes.
  - wbsss4412 5y ago
    Do you believe it is ever proper to raise taxes? I can’t help but assume that this is a fairy dogmatic, rather than a nuanced response.
throw0101a 5y ago
> I would love to understand why the fed hasn't increased interest rates to counter the rapid increase of inflation..? Will increased interest rates unclog ports and reduce transportation costs? Will it reduce gas prices? Will it shift spending from goods to services? It is necessary to look at the components of the CPI to see where the increases came from instead of looking at just the headlines.
CrimpCity 5y ago
My understanding is that increasing interest rates would tame inflation however there will be a slight recession or dip since prices will fall and given the upcoming elections the powers that be want a VERY gradual uptick with minimal economic fallout. You’re damned if you do and damned if you don’t.
simonblack 5y ago
I would love to understand why the fed hasn't increased interest rates to counter the rapid increase of inflation..? The US can't afford it. With a national debt of 30 trillion dollars, a 1% increase in the interest rate would cost the US an extra 0.3 trillion dollars per year. In other words, an extra 300 billion dollars per year. Looked at in other terms, that's nearly half of the Defense Budget in money 'down the drain'. The interest rate will never go up to any usable extent until the either the US Dollar or the US Economy (or both) crashes.

anm89 5y ago

Because half of US companies and the US government itself as long as basically every pension and retirement fund are levered up either directly or indirectly to their eyeballs in cheap debt. Our entire system would quickly be insolvent at a rate that would have seemed low 20 years ago.

myth_drannon 5y ago

Housing and Stock market bubbles will implode.

voxadam 5y ago
If they're bubbles aren't they going to implode regardless?
- xwdv 5y ago
  Bubbles don’t have to implode. They can just reach a point where there’s a long consolidation and things are sideways until reality fully rationalizes the bubble and it shrinks. This happens all the time with stocks. A stock could get very bubbly and reach an insane valuation to the point people think it will pop! But then it never does, instead it just stops rising and the underlying company eventually catches up to the valuation, until people think it’s a good buy again and start pumping the price even higher to the next leg up. Eventually the stock can never truly pop and go back to the pre-bubble levels because in the time that has passed the company actually did become more valuable.

sealthedeal 5y ago

They cant raise interest rates. If they do it will be nominal. We have too much debt. If we raise interest rates we will bankrupt ourselves. Inflation helps us chip away at the debt .

deleted 5y ago
[deleted]

SubiculumCode 5y ago

Lesson learned from 2008 was not fear ofinflation, it was fear of not injecting adequate money into a market after a downturn. I don't know what you're talking about.

neffy 5y ago

It won't stop the inflation. When inflation is due to printing money, the only thing that can be done is to sit back and wait for it to work it's way through the system. All raising interest rates would do is trigger a rerun of the Savings and Loan Crisis, as the huge quantity of long term, fixed rate, low interest rate loans, is suddenly devalued by short term, high interest rate loans. (Which is probably going to happen anyway, because Central Bank control over interest rates can be more than slightly illusionary at times like this. (Lenders can work out inflationary devaluation rates just as well as anybody else can.) 2008 was a very different scenario, the money that was printed then was forced into a narrow loop within the financial system and just used to sanitise a lot of bad debt away from the banking system. In some sense, the eventual logic of the last 20 years of massive increases in the total amount of debt circulating, due to loan securitisation, was that that debt would have to be devalued to make it repayable. And here we are.

voisin 5y ago
> When inflation is due to printing money, the only thing that can be done is to sit back and wait for it to work it's way through the system. Source? This doesn’t seem right to me at all.
- deleted 5y ago
  [deleted]
- samspenc 5y ago
  I suspect there is no source for this, but OP is just summarizing what the Fed is hoping will happen -- basically they have printed too much money but they don't want to raise interest rates either, so they are just going to sit back and wait for the excess money to flow through the system.
jonnycomputer 5y ago
https://econbrowser.com/archives/2021/11/so-you-want-to-be-a-monetarist https://econbrowser.com/archives/2021/11/so-you-want-to-be-a...
XIVMagnus 5y ago

sleepysysadmin 5y ago

>I would love to understand why the fed hasn't increased interest rates to counter the rapid increase of inflation..? Collapse of the underlying assets that they hold. Bailing out the housing market during the pandemic means the fed holds lots of housing market. The theory is that they will let the assets mature and then pull the money back out to come back to a balance. I'll tell you now, if you believe that's about to happen I've got a bridge to sell you. The US still hadn't done this the day before covid started. Covid is far worse. >I remember learning some basic economics in 2019 about how the U.S. learned a valuable lesson from 2008. The irony is that the financial crisis at least help the USA today. Compare this to other countries like Canada and we are far worse off than the USA during the financial crisis. >How they will never make the same mistakes of letting inflation go unchecked because they have tools to work against it. Those tools are maxed out. > Yet inflation has rapidly scaled to 6.8% (reported). The fed made the claim that they would run inflation hotter because they didnt hit target of 2% during covid. The problem? They had to act by now. They've past that threshold of coming to parity. >Also, I am keeping supply chain demand in mind but I don't think it excuses the fed's decision to not immediately start curbing high inflation rates. My guess is that people with money are profiting and want to continue profiting until it is no longer sustainable. The metric to look at was GDP. When GDP was 6.7%, inflation was at 5.4% or so. The big problem is that gdp dropped to 2.1% and recession metrics spiked. If the fed increases rates while gdp is dropping. recession is certain. It's too late for them to undo what they did bailing out the housing market. It would seem counterproductive to spend all this money to prevent housing from crashing just to let it crash anyway. So we're stuck. Inflation is going sky high. It looks to be about 40% locked in right now over the next few years. You thought minimum wage wasnt keeping up? This is literally everyone except the rich getting much poorer soon.

XIVMagnus 5y ago
Thanks a lot for the explanation! I greatly appreciate you taking the time to break things down for me.
- sleepysysadmin 5y ago
  >Thanks a lot for the explanation! I greatly appreciate you taking the time to break things down for me. It's a super complex issue that even the Fed probably has yet to understand. So I certainly don't as well. Many consequences could happen instead. Flipside, what just happened? The government effectively owns a huge portion of land again. Sure someone else is holding the title but really the government owns it. The banks/funds sold it to the government because they know they dont want to hold it. What does communism look like? The government owns everything.

drdec 5y ago

> I would love to understand why the fed hasn't increased interest rates to counter the rapid increase of inflation..? One reason is that they are still purchasing assets in order to goose the economy. It doesn't make any sense to be revving the economy with one hand while tamping it down with the other plus the point of the buying is to artificially depress interest rates. IIRC at the last meeting they announced that they would accelerate the tapering down of asset purchases so that they would be done in March. They also like to move slowly which is why they don't just halt the asset purchases and start raising rates. They treat the economy with kid gloves so they don't break it (right or wrong, for better or for worse, that's how it goes).

pjc50 5y ago

Well, they've written their reasons down: https://www.cnbc.com/2021/10/19/federal-reserve-powells-5-key-inflation-criteria-arent-holding-up-well.html https://www.cnbc.com/2021/10/19/federal-reserve-powells-5-ke... Basically they can only control inflation in the future, and they believe the inflation we've just seen is a result of the one-off of the pandemic response. Given that the interest rate mechanism affects inflation by increasing unemployment and harming the economy, they don't want to do that until it's necessary. (I should note that it's theoretically possible to do inflation control by fiscal policy, i.e. mop up some of the spare money by taxation, but that's obviously not going to happen)

dantheman 5y ago
Probably better to just reduce government spending than increase taxes.
- wbsss4412 5y ago
  Do you believe it is ever proper to raise taxes? I can’t help but assume that this is a fairy dogmatic, rather than a nuanced response.

throw0101a 5y ago

> I would love to understand why the fed hasn't increased interest rates to counter the rapid increase of inflation..? Will increased interest rates unclog ports and reduce transportation costs? Will it reduce gas prices? Will it shift spending from goods to services? It is necessary to look at the components of the CPI to see where the increases came from instead of looking at just the headlines.

CrimpCity 5y ago

My understanding is that increasing interest rates would tame inflation however there will be a slight recession or dip since prices will fall and given the upcoming elections the powers that be want a VERY gradual uptick with minimal economic fallout. You’re damned if you do and damned if you don’t.

simonblack 5y ago

I would love to understand why the fed hasn't increased interest rates to counter the rapid increase of inflation..? The US can't afford it. With a national debt of 30 trillion dollars, a 1% increase in the interest rate would cost the US an extra 0.3 trillion dollars per year. In other words, an extra 300 billion dollars per year. Looked at in other terms, that's nearly half of the Defense Budget in money 'down the drain'. The interest rate will never go up to any usable extent until the either the US Dollar or the US Economy (or both) crashes.