6 ms·

This isn’t exactly great news, but it’s probably not as bad as you think. It means that inflation is a tractable problem. The Fed as a lot of tools at its dispo

This isn’t exactly great news, but it’s probably not as bad as you think. It means that inflation is a tractable problem. The Fed as a lot of tools at its disposal (first of which is to take its foot off the gas). If we were in a situation where workers were demanding higher wages because they were expecting prices to go up, and businesses were raising prices to pay workers who were demanding higher wages, then we’d be in a much tougher spot. Wages not keeping up with prices means that’s not happening yet. By the end of next year, the narrative will shift away from rising inflation as the Fed tightens up, which will in turn cause inflation to fall.

landemva 5y ago
'The Fed as a lot of tools at its disposal...' Average and poor Americans would be better off with a simple formula to set money expansion. Then fire the private 'Federal Reserve' banksters and let someone else have the contract to clear checks. It is long past time to end the 3rd central bank.
- gibbonsrcool 5y ago
  Except for their role as referee. Forcing banks to implement their real time payments system FedNow seems like a good thing, but I’m just learning about it.
  - landemva 5y ago
    How well did they do as referee in 2008? Did they take prompt corrective action when it was obvious banks and rating agencies were mispricing their balance sheet items, or mostly wait for explosion and then bail out their buddies?
- thow-58d4e8b 5y ago
  The FED has tools to affect monetary base (physical currency + bank reserves). But inflation is mostly a function of money supply (physical currency + deposits), not monetary base. All tools at FED's disposal are very indirect, leading to frequent "pushing on a string" situations
neonbjb 5y ago
This is wrong IMO - the fed has NO tools in its hands. Its last tool was inflation rates, and it burned that during the great recession. It is now caught in a pickle: raise interest rates, causing a mass exodus of wealth from securities to savings accounts and CDs and causing the stock market to tumble (like it arguably always should have done since 2008), or let inflation take its course. I am not an economist, and I'd love to be proven wrong. I just don't see how this ends in a good way for the economy.
- kqr 5y ago
  That the fed has no tools is correct to the best of my understanding. The central banks are tasked with solving problems they have no mandate to solve. Inflation is, among other things, a problem of the market having too low a demand for money compared to the supply. One obvious way to fix that is by taxing money out of existence faster, decreasing the supply and thus increasing its value assuming demand stays fixed. (And there's reason to think it will; demand for money is a relatively unflexible parameter.) But of course, central banks do not control taxation, so there's not much they can do.
- carom 5y ago
  Inflation isn't bad, it is part of the interest rate cycle. You cut rates until you can't then you use inflation.
  - walkhour 5y ago
    Could you elaborate? Why is the interest rate cycle good?
    - carom 5y ago
      It's not good or bad, it just is. We're at the bottom right now, we'll stay here for a bit then experience inflation. Allocate assets accordingly. There isn't a good way up from zero interest rates besides printing money.
- baron816 5y ago
actually_a_dog 5y ago
That narrative makes sense, except for one thing: why wouldn't the Fed have taken their foot off the gas once inflation hit, say, 4%? Why wait until we're at 6.8%?
- habitue 5y ago
  The other mandate of the Fed is getting full employment. Pumping money into the economy helps increase employment and there is a long way to go to get back to pre-pandemic levels on that metric. They believed the inflation was transitory, and were going to wait it out. Now it's very clearly not transitory, so they are taking action
  - lobocinza 5y ago
    In the long run all is transitory. That being any action in a complex system can result in an unforeseen cascade of effects.
  - mellavora 5y ago
    Ah, the Phillips curve. I recommend you make some charts for yourself comparing US unemployment figures with CPI inflation and see if you can spot the curve. hint: https://www.hussmanfunds.com/wmc/wmc110404.htm https://www.hussmanfunds.com/wmc/wmc110404.htm spoiler: " there is in fact no strong "tradeoff" between unemployment and general price inflation, and almost certainly not an exploitable one. The Phillips Curve is essentially a statement that lower unemployment is associated with higher inflation in real wages. The strategy of accepting higher inflation in hopes of achieving lower unemployment (which is the basis of Bernanke's policy efforts) not only drops the phrase "real wages" but reverses the direction of cause and effect. " Also, it has clearly not been transitory for most of 2021. The "transitory" claim was backed partly by the pandemic, but relied on a 1-year lag. If, however, you used a 2-year lag (thus eliminating pandemic effects...
    - habitue 5y ago
      I was just explaining what the Fed's public reasoning has been. I am not knowledgeable enough to comment on the correctness of the theory.

landemva 5y ago

'The Fed as a lot of tools at its disposal...' Average and poor Americans would be better off with a simple formula to set money expansion. Then fire the private 'Federal Reserve' banksters and let someone else have the contract to clear checks. It is long past time to end the 3rd central bank.

gibbonsrcool 5y ago
Except for their role as referee. Forcing banks to implement their real time payments system FedNow seems like a good thing, but I’m just learning about it.
- landemva 5y ago
  How well did they do as referee in 2008? Did they take prompt corrective action when it was obvious banks and rating agencies were mispricing their balance sheet items, or mostly wait for explosion and then bail out their buddies?
thow-58d4e8b 5y ago
The FED has tools to affect monetary base (physical currency + bank reserves). But inflation is mostly a function of money supply (physical currency + deposits), not monetary base. All tools at FED's disposal are very indirect, leading to frequent "pushing on a string" situations

neonbjb 5y ago

This is wrong IMO - the fed has NO tools in its hands. Its last tool was inflation rates, and it burned that during the great recession. It is now caught in a pickle: raise interest rates, causing a mass exodus of wealth from securities to savings accounts and CDs and causing the stock market to tumble (like it arguably always should have done since 2008), or let inflation take its course. I am not an economist, and I'd love to be proven wrong. I just don't see how this ends in a good way for the economy.

kqr 5y ago
That the fed has no tools is correct to the best of my understanding. The central banks are tasked with solving problems they have no mandate to solve. Inflation is, among other things, a problem of the market having too low a demand for money compared to the supply. One obvious way to fix that is by taxing money out of existence faster, decreasing the supply and thus increasing its value assuming demand stays fixed. (And there's reason to think it will; demand for money is a relatively unflexible parameter.) But of course, central banks do not control taxation, so there's not much they can do.
carom 5y ago
Inflation isn't bad, it is part of the interest rate cycle. You cut rates until you can't then you use inflation.
- walkhour 5y ago
  Could you elaborate? Why is the interest rate cycle good?
  - carom 5y ago
    It's not good or bad, it just is. We're at the bottom right now, we'll stay here for a bit then experience inflation. Allocate assets accordingly. There isn't a good way up from zero interest rates besides printing money.
baron816 5y ago

actually_a_dog 5y ago

That narrative makes sense, except for one thing: why wouldn't the Fed have taken their foot off the gas once inflation hit, say, 4%? Why wait until we're at 6.8%?

habitue 5y ago
The other mandate of the Fed is getting full employment. Pumping money into the economy helps increase employment and there is a long way to go to get back to pre-pandemic levels on that metric. They believed the inflation was transitory, and were going to wait it out. Now it's very clearly not transitory, so they are taking action
- lobocinza 5y ago
  In the long run all is transitory. That being any action in a complex system can result in an unforeseen cascade of effects.
- mellavora 5y ago
  Ah, the Phillips curve. I recommend you make some charts for yourself comparing US unemployment figures with CPI inflation and see if you can spot the curve. hint: https://www.hussmanfunds.com/wmc/wmc110404.htm https://www.hussmanfunds.com/wmc/wmc110404.htm spoiler: " there is in fact no strong "tradeoff" between unemployment and general price inflation, and almost certainly not an exploitable one. The Phillips Curve is essentially a statement that lower unemployment is associated with higher inflation in real wages. The strategy of accepting higher inflation in hopes of achieving lower unemployment (which is the basis of Bernanke's policy efforts) not only drops the phrase "real wages" but reverses the direction of cause and effect. " Also, it has clearly not been transitory for most of 2021. The "transitory" claim was backed partly by the pandemic, but relied on a 1-year lag. If, however, you used a 2-year lag (thus eliminating pandemic effects...
  - habitue 5y ago
    I was just explaining what the Fed's public reasoning has been. I am not knowledgeable enough to comment on the correctness of the theory.