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Asking a stupid question here, so nobody knows how little I understand macroeconomics. Inflation is 8% or more. Interest rates are about 0.25%. How can we poss

• misja111 5y ago
  The general consensus is still that the current 8% inflation is mostly due to temporary factors. In particular the war in Ukraine and the uptick of the economy after Corona: they have pushed the energy prices up a lot, which in turn drive other prices up etc. So central banks don't feel the urgency to raise interest levels above 8% and consequently the market interest rate doesn't get too high either.
  • jbay808 5y ago
    > the current 8% inflation is mostly due to temporary factors. In particular the war in Ukraine 8% was from data as of February. By the way, shelter inflation is steadily climbing at 0.3% per month. That's going to be a fearsome trend to reverse.
• JumpCrisscross 5y ago
  > Unless we're profoundly convinced that the output gap is absolutely huge, then our interest rate is ridiculously too low Markets are profoundly convinced the output gap is/was huge. This is true in financial markets, which aren't dumping everything yielding less than 8%. It's true in the real economy, where inventories are being spun down [1]. It's true according to CBO [2] for the time period in which that eight percent registered. (Inflation was 7.9% February 2021 to '22. The CBO output gap was, in Q1 2021, roughly where it was in Q1 2003. After 9/11 and the dot-com crash.) Side note: this is probably the smartest question on this page. [1] https://fred.stlouisfed.org/series/ISRATIO https://fred.stlouisfed.org/series/ISRATIO [2] https://fred.stlouisfed.org/graph/?g=f1cZ https://fred.stlouisfed.org/graph/?g=f1cZ
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  • nostrademons 5y ago
    The charts you link make the argument that the output gap was huge. Notably, 2021Q4 CBO output gap is -0.44, about where it was in 2004Q4, when we were already well on to recovery. You can plug the actual value into the Taylor rule and it comes out at about 12.5%. My takeaways are that: a.) Interest rates are going way up from here. b.) Even if the Fed moves to where the dot-plots are projecting - about 3% in 2024 - it is way too little to contain inflation. I think their assumption is that inflation will come down on its own as supply-chain issues abate, but I don't share that assumption with the Fed.
    • JumpCrisscross 5y ago
      > You can plug the actual value into the Taylor rule and it comes out at about 12.5%. OP's equation for the Taylor Rule is...unorthodox [1]. For those who don't want to calculate equilibrium real interest rates and take logarithms of linear trends of GDPs, the Fed has a heat map tool [2]. It says 7 to 9%, using defaults. Higher than 3%. But within the model's error bars. (All that said, I have more confidence in inflation being manageable than rates remaining below 3%. Trading on that hunch, however, would require fighting the Fed. You don't fight the Fed.) [1] https://en.wikipedia.org/wiki/Taylor_rule#As_an_equation https://en.wikipedia.org/wiki/Taylor_rule#As_an_equation [2] https://www.atlantafed.org/cqer/research/taylor-rule https://www.atlantafed.org/cqer/research/taylor-rule
    • RC_ITR 5y ago
      Have you considered that we are in the midst of an unprecedented 'goods and services" supply shock and that will drive inflation 100x more than interest rates (which haven't shown any correlation to inflation since the 80's)?
      • memling 5y ago
        > (which haven't shown any correlation to inflation since the 80's) Side question: how do we calculate that correlation? To clarify, I understand that you can take two sets of observations and calculate rho, etc. What I'm really curious about is how (or whether) the correlation is adjusted. Suppose there is always some kind of base inflation that doesn't correlate with interest rates; do we have a sense for what the additive effect of changing interest rates does?
• ethbr0 5y ago
  > buy the basket of goods or gold or anything that holds its value in dollar terms Also, even trading commodities futures, at the end of the day there are physical commodity limits. Production, storage, transportation, consumption. You can't, for example, decide to invest the Chinese trade surplus in soybeans. Size mismatch. So you (at nation-scale) have to pick the least bad of the options available to you.
• zozbot234 5y ago
  Interest rate raises work largely as a signal of future policy. Their 'effect' is thus entirely dependent on what the market was expecting before, and how expectations change as a result. The "Taylor rule" fails to account for this, of course.
• adam_arthur 5y ago
  The Fed still believes inflation will come down on its own as fiscal stimulus impact fades. Pretty clear if you read between the lines of what Powell's saying. I tend to agree for some portion of inflation, but it's hard to tell because consumers paid down a lot of debt, refinanced their houses, student loans pause. So even without new fiscal stimulus, consumer spending power will remain elevated. Labor market is also tighter than anytime in history, which would logically lead to a wage price spiral. Credit card debt is rising quickly though. And finally, the most consequential rates for the economy are longer term rates, which are more market driven, not the overnight rate. But if 10y treasury rises to even 3.5-4%, all asset valuations will implode, for the most part. Fed have backed themselves into a corner by waiting far, far too long to take any policy action. Pretty gross negligence of their duties IMO, when warning signs have been blaring for close to a year This will go down as one of the biggest policy mistakes in Fed history.
  • f38zf5vdt 5y ago
    > But if 10y treasury rises to even 3.5-4%, all asset valuations will implode As of February, 2022 the 10y has been rising at 0.1% _per week_, so 4% in the next 3 years seems pretty optimistic.
    • adam_arthur 5y ago
      I expect it to hit 3% within a month or two, along with 5-6% mortgage rates. Buying a house now has more risk than anytime since the mid 2000s. Though many would surely dispute. Don't need to get into all the stats, but the interpretation of the stats being used to drive the FOMO narrative is a result of stats crime and misunderstanding There comes a level with long bonds where indebted companies start to fail, and it's not very high. This will cap the 10y from going too excessively high, as bond traders are pretty smart and will buy when they think we're near the cap. Personally I think zombie companies should be allowed to fail. Kinda like forest management for the economy. It's the better alternative to carrying non viable businesses into perpetuity. The Fed has erred on the side of bailing out speculators far too heavily... creates big moral hazard
• victorvosk 5y ago
  I am not sure why everyone is giving complicated answers. The answer is yes, borrow until you can't. The rich do this all the time. This has been true for decades now. We are locked into a downward trend where 0% will ultimately be the norm. We will then decide what is more important, preserving sanity or going negative. The price of sanity will be pain like no one has ever experienced since the great depression.
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• RockyMcNuts 5y ago
  I would use PCE inflation of 5% and output gap of 0 which gives 8.5% target. 5 + 0 + 0.5 (5-2) + 2 Atlanta Fed has a calculator https://www.atlantafed.org/cqer/research/taylor-rule https://www.atlantafed.org/cqer/research/taylor-rule to the extent you think there is an output gap or you are willing to let inflation run hot for a bit due to COVID catchup because you think it's temporary, you can shade that down but it only gets you a couple percent. so the march 2022 Fed dot plot with rates maxing out around 3% seems pretty optimistic. but if they posted a dot plot in line with Taylor rule, markets would crash, politicians would go nuts. so they are not going to do that, so they will keep tightening gradually and hope for the best. it's hard to see inflation cooling sufficiently without a recession. eventually at some point of course we will end up in one. the question is how long and how high inflation has to get. the political implications of a recession right now are a bit grim.
• phkahler 5y ago
  Remember that as they raise the rates, everything else will start changing as well. In particular mortgage rates will rise and home prices will fall as a result. The number of people refinancing is already dropping. That will in turn affect peoples spending and reduce inflation some. It's a complex system so changing one parameter will lead to changes in the others.
• dragontamer 5y ago
  You're ignoring the knock-on effects on the bond market for each rate increase. Last year, if you bought 10-year bonds, they'd be something like 2% interest rate. Today, its 2.38%. This means that all 10-year bonds bought in 2021 (aka: today a 9-year bond) is 2%, or roughly $11,800 value remaining. But a 10-year bond in 2022 is 2.38%, or roughly $12,380. Relative to the 2021 bonds, you just "dropped the value" of 2021 bonds by $500-per-$10k or so. Literally, in the space of a few weeks, everyone who had 10-year-bonds from 2021 just __LOST__ money on the interest rate hike. ------- Since banks and other large investors all own substantial amounts of bonds, the short-term effects of interest-rate changes on the _VALUE_ of bonds (ie: the 2021 issues) is arguably more important than the coupon itself. If we're looking at +1% increase this year (to a 10Y rate of 3%), then a 10-year $10k bond 10Y @ 3% will have a Yield-to-Maturity value of $13000, meaning that the 2021-issues are worth something like 12% LESS. EDIT: That's just the federal bond market. When you consider that car-loans, credit-cards, and Mortgages and HELOCs are also going to change in reaction to this (since these are higher-risk, a +1% chance to the "risk-free" federal rate probably will be a +1.5% to the other rates), the value of mortgages, credit card debt, car loans (etc. etc.) will similarly drop by 10%+. Also consider what it will do to home prices. +1% interest rate to any mortgage will cause the monthly payments to skyrocket by hundreds of dollars, which will force home-prices down.
  • eldavido 5y ago
    I don't think bond prices really matter. They do on treasuries as these are routinely bought and sold. But consider that most banks, card companies, etc are more like retailers. They buy money at a certain price X (their funding costs) and sell it at Y (loan/card interest rates). As long as Y-X is positive, they're broadly OK. The ultimate owners of these bonds are pensions, insurance, endowments, and other large actors who are basically price takers. They have huge piles of money to invest ($xx/xxx billion), and limits in how much risk they can take (e.g. only investment-grade debt) but beyond that, are looking for the best price offered given how much they need to invest, and matching the term (e.g. 5 years) to their portfolio needs. These people tend to hold bonds to maturity and just reinvest the proceeds when they mature. They don't sell them on the secondary market as much.
• _hcuq 5y ago
  Ok… go and buy a house now. Buy the biggest one you can afford, with an adjustable rate mortgage. See what happens….
  • SuoDuanDao 5y ago
    I thought the whole point was that it's the fixed rate that is nowhere near inflation?
    • snuxoll 5y ago
      For now - do you think 7+% CPI inflation is going to persist for 2, 3, or 5 years? What if the Fed manages to tame the beast and we go back down to our average 2% inflation we had for the prior decade? If you're going long on persistent inflation than go buy TIPS, I know I did as a hedge while the rest of my money is going into 1-year treasury bills because things are going to get crazy volatile as the fed funds rate continues to hike. Buying housing in a rising rate environment is playing chicken, as rates go up affordability goes down and so does the value of the home. That's the fundamentals in a normal market, at least, because ultimately mortgage payments have to come from wages somehow. I wouldn't buy something banking on the crazy appreciation train continuing at this stage.
  • jsnodlin 5y ago
• beefman 5y ago
  The Taylor rule describes monetary policy in a regime where the federal funds rate is the primary monetary policy tool. It doesn't apply in a regime with enormous QE/QT going on. It also requires instantaneous measurement of its variables. These can be estimated in normal times but it's hard when there's been a recent anomaly. Is the 5.6% T4Q real growth the new normal or just the result of measuring out of a trough? One view of monetary policy is that its ultimate goal should be to stabilize NGDP growth -- usually to something like 5%. Looking at the trailing 8 quarters since 2019-Q4, NGDP growth has been 5.2%. Remarkably good. But there is some cause for concern. In my view: rising petroleum prices, QT, and further supply constraints from zero-Covid policy in China (in that order).
• msluyter 5y ago
  > At that level, it still makes sense to borrow all you can, buy the basket of goods or gold or anything that holds its value in dollar terms, sell it later on, and pay the loan back. I'm guessing -- also not deeply versed in macroeconomics -- that "buy the basket of goods or gold or anything that holds its value in dollar terms" isn't actually that easy. For one, if everyone does that, you'd expect current prices of said goods to rise, and then fall when you try to sell them. Thus there's some risk that you'll essentially mis-time your transactions and buy high / sell low. Two, there may be other reasons whatever you buy fails to hold its value. Someone might discover a giant gold deposit or whatnot, rocking the gold market. Three, there are transaction costs. For property, you're paying realtors, home inspectors, closing costs, etc... I'm sure this is an incomplete and naive analysis.
• dash2 5y ago
  Answering my own question to point out a relevant article: https://moneyinsideout.exantedata.com/p/what-happened-to-the-taylor-rule?s=r https://moneyinsideout.exantedata.com/p/what-happened-to-the...
• hackernewds 5y ago
  It's not a stupid question. It's just that macroeconomics is not a scientific field. You can always override a historic precedent with another - and have no way of testing hypotheses in a controlled manner