5 ms·

> a good reason to never let rates get this low in the first place My brother-in-law remarked that "the fed is overdue to raise rates". My reply: asset prices

> a good reason to never let rates get this low in the first place My brother-in-law remarked that "the fed is overdue to raise rates". My reply: asset prices don't matter to ordinary people. You already know this, but the Fed's mandate is "price stability and full employment". Full employment is going great -- the job market is tight, low-end labor is seeing lots of wage growth, everyone who wants a job is getting one. Price stability was also fine until about 6 months ago. The thing I keep coming back to, is how incredibly little asset prices really matter, in the larger scheme of things. What does matter is things like employment, the price of milk, and whether people have a roof over their heads (rental affordability). In the larger sense, the fed's hands are tied, unless their legal mandate is amended to include "not creating asset bubbles". The distributive and stability effects of today's monetary policy might be the longest-lasting intellectual shift to come out of all this.

recursivedoubts 5y ago
i don't think the fed's real mandate is price stability and full employment, those are nice to haves and they have to say that so they aren't run out of town on a rail but their real mandate is: "protect the banks" at this point, that may be changing to "protect their necks" rock and hard place, we'll see what happens
- arcticbull 5y ago
  > i don't think the fed's real mandate is price stability and full employment, those are nice to haves and they have to say that so they aren't run out of town on a rail but No that's literally their mandate. The Federal Reserve Act mandates that the Federal Reserve conduct monetary policy "so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." [1] https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm https://www.federalreserve.gov/monetarypolicy/monetary-polic...
  - recursivedoubts 5y ago
    Right. I know they have to say that. But I think they are lying. many such cases
    - toomuchtodo 5y ago
      You are both right. The Fed has its public mandates (which it uses the coarse tool of interest rates to manage), but also protects US commercial banks through their refusal to issue narrow bank licenses and their refusal to issue a CBDC or FedAccounts without being shoved by the legislative and executive branches (just like they dragged their feet on FedNow until Congress lit a fire under them because Zelle, owned by the largest banks, was acting anti competitively with smaller community banks). Lots of Fed criticism to go around for everyone’s enjoyment.
      - arcticbull 5y ago
        We're not both right when parent is saying the "federal reserve is lying about its mandate" - which makes no sense, not least because the mandate is defined, by Congress, in the Federal Reserve Act. The Fed's job is to execute on it. You can argue about their efficacy or tactics (in spite of their pretty solid ~110 year track record), but that's not the same thing. It's like saying you think the USPS is lying that they have the mandate to deliver letters.
        toomuchtodo 5y ago
        Getting thoughts to bits can be challenging. As the saying goes: > Please respond to the strongest plausible interpretation of what someone says, not a weaker one that's easier to criticize. Assume good faith.
        deleted 5y ago
        [deleted]
- legitster 5y ago
  The dual mandate is literally described on their website: https://www.chicagofed.org/research/dual-mandate/dual-mandate https://www.chicagofed.org/research/dual-mandate/dual-mandat...
  - lordnacho 5y ago
    The Queen is literally the ruler of the UK. It says so in the laws. The GP is saying that the Fed has other objectives than the ones that are formally stated.
mberning 5y ago
Asset prices matter a lot to people that want to buy homes, cars, make investments, etc. unless you are a WEF/great reset acolyte.
djrogers 5y ago
> What does matter is ... (rental affordability) Rental affordability is 100% correlated to asset pricing.
- dragonwriter 5y ago
  > Rental affordability is 100% correlated to asset pricing. It's not, though. In a very simplified toy model, maybe there should be a direct 1:1 link, but empirically in reality there isn't even close.
- dmw1 5y ago
  To a degree but it has an upper bound of income. Unless people are going to start taking on mortgages to pay their rent.
- maerF0x0 5y ago
  Of course rental affordability is not tied to asset pricing. Simply put it's tied to opex + cost of capital. And is opportunity costed against other investments -- but keep in mind real estate has high exit costs (realtor). So you'd have to think you can do much better on another investment to sell (and drive the asset price down) for it to make any sense. The insight is that the cost of capital is roughly fixed at the time of purchase. If someone bought a place in 1970 they can price bid down to nearly nothing because that's their operating cost and the purchase price is only a fraction of landlords who bought recently. Supply and demand create the conditions where landlords either compete on price, choose to sell, or potentially declare bankruptcy.
- vkou 5y ago
  This is where you're wrong. It's the other way around. Asset pricing is what's correlated to rental affordability. If the tenant class, in general, can't afford rent increases, rent won't increase, and real estate asset prices will stop growing, all other things being equal. Obviously, if money becomes cheaper for landlords, then they will borrow more of it to buy the same properties. But this does not give them any more power to unilaterally set rents. But all in all, the tail does not wag this dog.
- randomdata 5y ago
alasdair_ 5y ago
>My reply: asset prices don't matter to ordinary people. Home values matter enormously to people. So does the value of their 401k, especially those aged 50+
- DanTheManPR 5y ago
  I'm glad I bought my house while rates are very low. While sticker prices are very high right now, the price when factoring in very low interest rates on mortgages are much closer to a historical normal (although still elevated because of the lack of new construction over the last few years). I'm worried for new buyers in the coming years getting stick with these same high sticker prices, AND high interest rates.
  - californical 5y ago
    But when interest rates go up, the price of homes will drop. Sal is an average American. Sal can afford $1500/mo for a mortgage, regardless of interest rates. Today, Sal can get a 3% rate, meaning they can afford a $440k mortgage (with 20% down payment). If interest rates rise to 6%, Sal can now only afford a $310k mortgage for that same $1500/mo. If Sal were the only person who had this problem, then Sal would have to settle for a cheaper house than average. But if 90%+ of buyers are in the same situation, then the housing supply will be overpriced compared to what the market is able to pay. This drives the prices way down, and it would eventually settle to the price that the market can bear, which might be slightly more than the $310k, but probably not too much.
    - alasdair_ 5y ago
      >Sal can afford $1500/mo for a mortgage, regardless of interest rates. If interest rates are 15% like they were in the early 80s, Sal will be expecting salary increases of >15% a year to keep up, so that $1500/mo won't stay that way for long.
abernard1 5y ago
> My reply: asset prices don't matter to ordinary people. They do. A large percentage of the population has 401Ks, and many public sector pension plans have equity components. Housing prices are also assets, and inflation in that sector has priced out many people from affording homes, despite low financing costs. > Full employment is going great -- the job market is tight We are nowhere close to full employment. We're 3M jobs lower than pre-COVID in the U.S [1], and according to Keynesians, Monetarists, Monetary Keynesians, or whatever hybrid form of wishy washy economics that has used the Phillips curve as policy guidance, this inflation should not happen. > In the larger sense, the fed's hands are tied, unless their legal mandate is amended to include "not creating asset bubbles" The Fed's "dual mandate" presumes that (based upon the Phillips curve) there is a sweet spot between full employment and inflation. The correlation is entirely, completely broken [2]. [1] https://fred.stlouisfed.org/series/PAYEMS https://fred.stlouisfed.org/series/PAYEMS [2] https://www.nber.org/digest/sep19/phillips-curve-still-useful-guide-policymakers https://www.nber.org/digest/sep19/phillips-curve-still-usefu...
- corpdronejuly 5y ago
  The job market seems to be tight because the folks hiring are unwilling to pay folks to keep up with the inflation we're seeing. It's not worth it for many people in a family to take outside work when childcare costs so much more.
  - abernard1 5y ago
    How do you suppose to quantify that? How do you suppose the Fed should quantify that? How do you suppose the parent poster can justifiably say we're at full employment without a hand-wavy appeal to authority? I won't agree or disagree with your comment, I will just say that the parent poster's comments are all unsupported by data. Clearly, we had a realm only two years ago with (1) millions of people more in the labor market, (2) inflation at 1/4 of what it is now. We also have been told for two years that inflation like this was impossible, despite editorial after editorial from non-Keynesians saying that we should expect high inflation and supply shocks. This is because supply shocks inevitably happen when capital is mispriced and aggregate demand is forced via government spending. The notoriously smooth supply chains (ha ha) of Soviet command economies was not a historical aberration generated via inflation. So I won't be listening to the people who have been wrong for two years. Their economic model is wrong, and we can expect their predictions to look like the "Cloud of Points" section of the Phillips curve from the 1970s [1]. [1] https://www.stlouisfed.org/open-vault/2020/january/what-is-phillips-curve-why-flattened https://www.stlouisfed.org/open-vault/2020/january/what-is-p...
ck2 5y ago
Rents are 18-21% higher now as leases expire. It's massive, some people more than $100 per month increase. The waves of homelessness and people living out of their cars starts in a few months. https://www.apartmentlist.com/research/metro-rent-changes-18-21 https://www.apartmentlist.com/research/metro-rent-changes-18...
- titzer 5y ago
  Some places are ahead of the curve. Los Angeles is already not looking good in terms of homelessness.
  - redisman 5y ago
    West coast hasnt looked good in homelessness for decades
- vsskanth 5y ago
  Can confirm anecdotally. Ending my 2BR apartment lease at 963/month to move into a house in a different location. Currently being re-listed at 1300/month.I was paying 850/month last year. Last year I looked at renting a similar 2BR apartment in the new place, but prices jumped from 1300/month to 1650/month in like 6 months. So just went ahead and bought a house.
- hedora 5y ago
  Yes, and there's a massive labor shortage too. Apparently people won't work for starvation wages. It'll work out in a year or so, or we'll get hit with hyperinflation.
fallingfrog 5y ago
Asset prices do matter, but in an inverse way: ordinary people benefit when asset prices go down, especially housing. Of course, the government is doing everything in its power to make sure asset prices stay inflated, which tells you something about whose priorities they take seriously.
squidlogic 5y ago
>asset prices don't matter to ordinary people. Can you provide some data on this assertion? I would be surprised to learn that the majority of ordinary people (assuming you mean something like 'net worth < $1MM USD') do not care about housing costs and car costs, which are both assets.
- eldavido 5y ago
  The median net worth in the United States is approximately zero (assets less student loans, mortgage debt, etc). The median 401k balance in the US is something like 100k. I'm probably right of many people here politically but will readily admit, there's a lot less wealth out there than you'd think, and what there is, is held by a pretty small number of people. Also, speaking broadly, I don't think the economics profession really understands the connection between house prices and rents. It's a complex topic with a lot of conflicting information. I definitely wouldn't take it as an article of faith that more expensive housing necessarily implies higher rents. There are all kinds of complex subsidies like mortgage interest deductions, factors like credit availability, short-term fluctuations in material and labor prices, etc that make a straight-through 1:1 correlation too clean. As a general comment, it helps to disaggregate when thinking about huge topics like rental inflation. Rent is growing fast in western/mountain markets (e.g. Idaho) and places like Miami, while hardly budging in places like Cleveland or St. Louis. I'm sorry not to have citations on a lot of this, it mostly comes from firsthand experience and a lot of reading -- I read the economist cover-to-cover every week, manage 12 rental units, and talk to friends and family spread across the US (Seattle, DC, Chicago, Indiana, etc) almost every week.
  - ask_b123 5y ago
    Where did you get the data on median net worth? I found this, https://en.wikipedia.org/wiki/List_of_countries_by_wealth_per_adult https://en.wikipedia.org/wiki/List_of_countries_by_wealth_pe..., which states that the median U.S. net worth per adult is 79,274. Following the references and links I ended up reading this: https://www.federalreserve.gov/publications/files/scf20.pdf https://www.federalreserve.gov/publications/files/scf20.pdf, on the top of page 6 there is an interesting tidbit: > One liability of using the median as a descriptive device is that medians are not additive—that is, the sum of the medians of two items for the same population is not generally equal to the median of the sum (for example, median assets minus median liabilities will generally not equal median net worth). In contrast, means for a common population are additive.
lr4444lr 5y ago
Tell the hundreds laid off this week at Peloton that asset prices don't matter. This stuff is a lot more interrelated than theorists with simple solutions like to think.
jfooboz 5y ago
I don't understand the assertion that asset prices don't matter to ordinary people. The price of housing is impactful to everyone, and bubbles in it destructive.
MuffinFlavored 5y ago
> Full employment is going great Is it? I thought we still have a labor shortage and the unemployment metric is skewed because it doesn't tell the full story of people who just left the labor market.

recursivedoubts 5y ago

i don't think the fed's real mandate is price stability and full employment, those are nice to haves and they have to say that so they aren't run out of town on a rail but their real mandate is: "protect the banks" at this point, that may be changing to "protect their necks" rock and hard place, we'll see what happens

arcticbull 5y ago
> i don't think the fed's real mandate is price stability and full employment, those are nice to haves and they have to say that so they aren't run out of town on a rail but No that's literally their mandate. The Federal Reserve Act mandates that the Federal Reserve conduct monetary policy "so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." [1] https://www.federalreserve.gov/monetarypolicy/monetary-policy-what-are-its-goals-how-does-it-work.htm https://www.federalreserve.gov/monetarypolicy/monetary-polic...
- recursivedoubts 5y ago
  Right. I know they have to say that. But I think they are lying. many such cases
  - toomuchtodo 5y ago
    You are both right. The Fed has its public mandates (which it uses the coarse tool of interest rates to manage), but also protects US commercial banks through their refusal to issue narrow bank licenses and their refusal to issue a CBDC or FedAccounts without being shoved by the legislative and executive branches (just like they dragged their feet on FedNow until Congress lit a fire under them because Zelle, owned by the largest banks, was acting anti competitively with smaller community banks). Lots of Fed criticism to go around for everyone’s enjoyment.
    - arcticbull 5y ago
      We're not both right when parent is saying the "federal reserve is lying about its mandate" - which makes no sense, not least because the mandate is defined, by Congress, in the Federal Reserve Act. The Fed's job is to execute on it. You can argue about their efficacy or tactics (in spite of their pretty solid ~110 year track record), but that's not the same thing. It's like saying you think the USPS is lying that they have the mandate to deliver letters.
      - toomuchtodo 5y ago
        Getting thoughts to bits can be challenging. As the saying goes: > Please respond to the strongest plausible interpretation of what someone says, not a weaker one that's easier to criticize. Assume good faith.
        deleted 5y ago
        [deleted]
legitster 5y ago
The dual mandate is literally described on their website: https://www.chicagofed.org/research/dual-mandate/dual-mandate https://www.chicagofed.org/research/dual-mandate/dual-mandat...
- lordnacho 5y ago
  The Queen is literally the ruler of the UK. It says so in the laws. The GP is saying that the Fed has other objectives than the ones that are formally stated.

mberning 5y ago

Asset prices matter a lot to people that want to buy homes, cars, make investments, etc. unless you are a WEF/great reset acolyte.

djrogers 5y ago

> What does matter is ... (rental affordability) Rental affordability is 100% correlated to asset pricing.

dragonwriter 5y ago
> Rental affordability is 100% correlated to asset pricing. It's not, though. In a very simplified toy model, maybe there should be a direct 1:1 link, but empirically in reality there isn't even close.
dmw1 5y ago
To a degree but it has an upper bound of income. Unless people are going to start taking on mortgages to pay their rent.
maerF0x0 5y ago
Of course rental affordability is not tied to asset pricing. Simply put it's tied to opex + cost of capital. And is opportunity costed against other investments -- but keep in mind real estate has high exit costs (realtor). So you'd have to think you can do much better on another investment to sell (and drive the asset price down) for it to make any sense. The insight is that the cost of capital is roughly fixed at the time of purchase. If someone bought a place in 1970 they can price bid down to nearly nothing because that's their operating cost and the purchase price is only a fraction of landlords who bought recently. Supply and demand create the conditions where landlords either compete on price, choose to sell, or potentially declare bankruptcy.
vkou 5y ago
This is where you're wrong. It's the other way around. Asset pricing is what's correlated to rental affordability. If the tenant class, in general, can't afford rent increases, rent won't increase, and real estate asset prices will stop growing, all other things being equal. Obviously, if money becomes cheaper for landlords, then they will borrow more of it to buy the same properties. But this does not give them any more power to unilaterally set rents. But all in all, the tail does not wag this dog.
randomdata 5y ago

alasdair_ 5y ago

>My reply: asset prices don't matter to ordinary people. Home values matter enormously to people. So does the value of their 401k, especially those aged 50+

DanTheManPR 5y ago
I'm glad I bought my house while rates are very low. While sticker prices are very high right now, the price when factoring in very low interest rates on mortgages are much closer to a historical normal (although still elevated because of the lack of new construction over the last few years). I'm worried for new buyers in the coming years getting stick with these same high sticker prices, AND high interest rates.
- californical 5y ago
  But when interest rates go up, the price of homes will drop. Sal is an average American. Sal can afford $1500/mo for a mortgage, regardless of interest rates. Today, Sal can get a 3% rate, meaning they can afford a $440k mortgage (with 20% down payment). If interest rates rise to 6%, Sal can now only afford a $310k mortgage for that same $1500/mo. If Sal were the only person who had this problem, then Sal would have to settle for a cheaper house than average. But if 90%+ of buyers are in the same situation, then the housing supply will be overpriced compared to what the market is able to pay. This drives the prices way down, and it would eventually settle to the price that the market can bear, which might be slightly more than the $310k, but probably not too much.
  - alasdair_ 5y ago
    >Sal can afford $1500/mo for a mortgage, regardless of interest rates. If interest rates are 15% like they were in the early 80s, Sal will be expecting salary increases of >15% a year to keep up, so that $1500/mo won't stay that way for long.

abernard1 5y ago

> My reply: asset prices don't matter to ordinary people. They do. A large percentage of the population has 401Ks, and many public sector pension plans have equity components. Housing prices are also assets, and inflation in that sector has priced out many people from affording homes, despite low financing costs. > Full employment is going great -- the job market is tight We are nowhere close to full employment. We're 3M jobs lower than pre-COVID in the U.S [1], and according to Keynesians, Monetarists, Monetary Keynesians, or whatever hybrid form of wishy washy economics that has used the Phillips curve as policy guidance, this inflation should not happen. > In the larger sense, the fed's hands are tied, unless their legal mandate is amended to include "not creating asset bubbles" The Fed's "dual mandate" presumes that (based upon the Phillips curve) there is a sweet spot between full employment and inflation. The correlation is entirely, completely broken [2]. [1] https://fred.stlouisfed.org/series/PAYEMS https://fred.stlouisfed.org/series/PAYEMS [2] https://www.nber.org/digest/sep19/phillips-curve-still-useful-guide-policymakers https://www.nber.org/digest/sep19/phillips-curve-still-usefu...

corpdronejuly 5y ago
The job market seems to be tight because the folks hiring are unwilling to pay folks to keep up with the inflation we're seeing. It's not worth it for many people in a family to take outside work when childcare costs so much more.
- abernard1 5y ago
  How do you suppose to quantify that? How do you suppose the Fed should quantify that? How do you suppose the parent poster can justifiably say we're at full employment without a hand-wavy appeal to authority? I won't agree or disagree with your comment, I will just say that the parent poster's comments are all unsupported by data. Clearly, we had a realm only two years ago with (1) millions of people more in the labor market, (2) inflation at 1/4 of what it is now. We also have been told for two years that inflation like this was impossible, despite editorial after editorial from non-Keynesians saying that we should expect high inflation and supply shocks. This is because supply shocks inevitably happen when capital is mispriced and aggregate demand is forced via government spending. The notoriously smooth supply chains (ha ha) of Soviet command economies was not a historical aberration generated via inflation. So I won't be listening to the people who have been wrong for two years. Their economic model is wrong, and we can expect their predictions to look like the "Cloud of Points" section of the Phillips curve from the 1970s [1]. [1] https://www.stlouisfed.org/open-vault/2020/january/what-is-phillips-curve-why-flattened https://www.stlouisfed.org/open-vault/2020/january/what-is-p...

ck2 5y ago

Rents are 18-21% higher now as leases expire. It's massive, some people more than $100 per month increase. The waves of homelessness and people living out of their cars starts in a few months. https://www.apartmentlist.com/research/metro-rent-changes-18-21 https://www.apartmentlist.com/research/metro-rent-changes-18...

titzer 5y ago
Some places are ahead of the curve. Los Angeles is already not looking good in terms of homelessness.
- redisman 5y ago
  West coast hasnt looked good in homelessness for decades
vsskanth 5y ago
Can confirm anecdotally. Ending my 2BR apartment lease at 963/month to move into a house in a different location. Currently being re-listed at 1300/month.I was paying 850/month last year. Last year I looked at renting a similar 2BR apartment in the new place, but prices jumped from 1300/month to 1650/month in like 6 months. So just went ahead and bought a house.
hedora 5y ago
Yes, and there's a massive labor shortage too. Apparently people won't work for starvation wages. It'll work out in a year or so, or we'll get hit with hyperinflation.

fallingfrog 5y ago

Asset prices do matter, but in an inverse way: ordinary people benefit when asset prices go down, especially housing. Of course, the government is doing everything in its power to make sure asset prices stay inflated, which tells you something about whose priorities they take seriously.

squidlogic 5y ago

>asset prices don't matter to ordinary people. Can you provide some data on this assertion? I would be surprised to learn that the majority of ordinary people (assuming you mean something like 'net worth < $1MM USD') do not care about housing costs and car costs, which are both assets.

eldavido 5y ago
The median net worth in the United States is approximately zero (assets less student loans, mortgage debt, etc). The median 401k balance in the US is something like 100k. I'm probably right of many people here politically but will readily admit, there's a lot less wealth out there than you'd think, and what there is, is held by a pretty small number of people. Also, speaking broadly, I don't think the economics profession really understands the connection between house prices and rents. It's a complex topic with a lot of conflicting information. I definitely wouldn't take it as an article of faith that more expensive housing necessarily implies higher rents. There are all kinds of complex subsidies like mortgage interest deductions, factors like credit availability, short-term fluctuations in material and labor prices, etc that make a straight-through 1:1 correlation too clean. As a general comment, it helps to disaggregate when thinking about huge topics like rental inflation. Rent is growing fast in western/mountain markets (e.g. Idaho) and places like Miami, while hardly budging in places like Cleveland or St. Louis. I'm sorry not to have citations on a lot of this, it mostly comes from firsthand experience and a lot of reading -- I read the economist cover-to-cover every week, manage 12 rental units, and talk to friends and family spread across the US (Seattle, DC, Chicago, Indiana, etc) almost every week.
- ask_b123 5y ago
  Where did you get the data on median net worth? I found this, https://en.wikipedia.org/wiki/List_of_countries_by_wealth_per_adult https://en.wikipedia.org/wiki/List_of_countries_by_wealth_pe..., which states that the median U.S. net worth per adult is 79,274. Following the references and links I ended up reading this: https://www.federalreserve.gov/publications/files/scf20.pdf https://www.federalreserve.gov/publications/files/scf20.pdf, on the top of page 6 there is an interesting tidbit: > One liability of using the median as a descriptive device is that medians are not additive—that is, the sum of the medians of two items for the same population is not generally equal to the median of the sum (for example, median assets minus median liabilities will generally not equal median net worth). In contrast, means for a common population are additive.

lr4444lr 5y ago

Tell the hundreds laid off this week at Peloton that asset prices don't matter. This stuff is a lot more interrelated than theorists with simple solutions like to think.

jfooboz 5y ago

I don't understand the assertion that asset prices don't matter to ordinary people. The price of housing is impactful to everyone, and bubbles in it destructive.

MuffinFlavored 5y ago

> Full employment is going great Is it? I thought we still have a labor shortage and the unemployment metric is skewed because it doesn't tell the full story of people who just left the labor market.