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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.

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
  - boringg 5y ago
    Very Schumpeter of you. I don't know how many people are in favor of zombie companies being kept alive...
    - bitcoin_anon 5y ago
      The owners and employees of said companies, generally.
    - adam_arthur 5y ago
      Did you not pay attention to the Fed's policy moves over the past 2 years? Which were clearly far in excess of what was necessary, once the acute crisis passed. They didn't even blink as housing rallied at the fastest pace in history as they continued to buy MBS month after month, artificially pushing mortgage rates lower. Hard to argue they cared at all about overdoing it, or distorting unviable companies towards profitability. This kind of policy approach steals wealth from future generations to pay the present. It's basic math. Personally, I prefer policy makers that optimize for the long run, even when it makes the present a bit more challenging
  - paulpauper 5y ago
    >I expect it to hit 3% within a month or two, along with 5-6% mortgage rates. never gonna happen. I would say there are greater odds of the stock market making new lows this year than that happening >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 People say this all the time yet real estate keeps doing well. > The Fed has erred on the side of bailing out speculators far too heavily... creates big moral hazard Still I'd rather not be fighting the fed. Stocks and real estate prices will likely go much higher.
    - adam_arthur 5y ago
      Mortgage rates are already over 5% for many, and the avg is around 4.8%. This is today, not in the future, if you haven't been paying attention. And the 10y is far below where it will likely settle. So 5-5.5% mortgage is pretty much a given within the next few months barring a sudden collapse in inflation Buying a house is fighting the fed now. They are trying to quell inflation and will very likely start selling MBS into the market next month to push mortgages rates even higher. Don't fight the fed works both ways. And don't even look at the inflation adjusted home price chart... Hint, they are far above the 2000s peak
nostromo 5y ago
> This will go down as one of the biggest policy mistakes in Fed history. The Fed largely caused the 2008 crisis by underestimating the effects of falling house prices on bank solvency. What's crazy is that all I hear about in the financial press is how the Fed saved the economy after 2008. Conveniently omitted is that their miscalculations also caused the crash. Whenever the Fed talks about finding a soft landing, I get nervous.
- adam_arthur 5y ago
  The Fed helped create the housing bubble to begin with. Greenspan cut rates massively after dotcom popped and took his sweet time to normalize. Bernanke certainly could have worked with fiscal policy to bring down housing in a controlled way, as it become an out of control snowball. Of course there were many other factors too, government policy encouraging and guaranteeing subprime mortgages, clueless borrowers, faulty credit assessments, too much leverage. IMO the government should seek not to create bubbles and also to set up a structure where it's inherently difficult for them to form. E.g. Limiting leverage for investors/important institutions is an obvious one. A system that relies on participants making smart decisions is doomed to fail in the long run. If buy and hold residential SFH investors were only allowed to lever up to 2x to 1, you would see significantly less speculation in SFH with minimal downside outside of investment returns for those investors. It really doesn't take a lot to set up a safe structure while still leaving it a mostly free market. Just requires foresight and a willingness to curb some of the fun/exuberance in the short run
  - socksset 5y ago
    It is hysterical Greenspan gets blamed for this when we have barely been able to keep rates off the floor the past 13 years since he left. https://fred.stlouisfed.org/series/FEDFUNDS https://fred.stlouisfed.org/series/FEDFUNDS If 2002-2004 was keeping rates too low then what do you call the past 14 years?
    - adam_arthur 5y ago
      He cut the funds rate from 6% to 1% pretty much overnight, which was excessive given there was only a mild recession at the time. To his credit he did start ratcheting it up shortly after. Low rate from past decade is for many reasons, high unemployment for most of the 2010s is the main one. Weak fiscal response to 2008 leading to slow recovery. The Fed shouldn't be the tool to try to address impact of a recession, it's much healthier to address through an intelligently crafted fiscal package. But the ease of being able to unilaterally set monetary policy tends to corrupt the Fed's decision making and skew it towards short term problems. All that being said, Greenspan did a hell of a better job than Powell overall
imtringued 5y ago
Speaking of policy mistakes, pretty much "everyone" agrees that raising interest rates now is a policy mistake.
- adam_arthur 5y ago
  The mistake has already been made. Markets crashing due to raising rates is due to the mistake made last year, and somewhat of an inevitable outcome. Similar to 2000s, Bernanke raised too fast, but the raising should have started years earlier to prevent the need to move so fast Otherwise we may very well end up in the 70s part two. There is not a good way out at this point unless the fiscal drag really is sufficient enough to cool inflation on its own. Which is really looking doubtful at this point. A creative way out would be for the Fed to partner with fiscal policy to enact a new tax scheme or similar which sucks some of the money out without requiring higher rates. But chance of that happening is pretty much 0. It looks like the aim for the BBB has barely changed, and will still be inflationary the way it's proposed. And keep in mind, long rates are market driven. If the Fed slow walk the rate increases, the 10y will just go up faster and faster as expectations of future inflation continue to go higher. There is no way to stop the repricing of the 10y at this point, aside from inflation coming down or more aggressive fed action to prove they are serious

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
- boringg 5y ago
  Very Schumpeter of you. I don't know how many people are in favor of zombie companies being kept alive...
  - bitcoin_anon 5y ago
    The owners and employees of said companies, generally.
  - adam_arthur 5y ago
    Did you not pay attention to the Fed's policy moves over the past 2 years? Which were clearly far in excess of what was necessary, once the acute crisis passed. They didn't even blink as housing rallied at the fastest pace in history as they continued to buy MBS month after month, artificially pushing mortgage rates lower. Hard to argue they cared at all about overdoing it, or distorting unviable companies towards profitability. This kind of policy approach steals wealth from future generations to pay the present. It's basic math. Personally, I prefer policy makers that optimize for the long run, even when it makes the present a bit more challenging
- paulpauper 5y ago
  >I expect it to hit 3% within a month or two, along with 5-6% mortgage rates. never gonna happen. I would say there are greater odds of the stock market making new lows this year than that happening >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 People say this all the time yet real estate keeps doing well. > The Fed has erred on the side of bailing out speculators far too heavily... creates big moral hazard Still I'd rather not be fighting the fed. Stocks and real estate prices will likely go much higher.
  - adam_arthur 5y ago
    Mortgage rates are already over 5% for many, and the avg is around 4.8%. This is today, not in the future, if you haven't been paying attention. And the 10y is far below where it will likely settle. So 5-5.5% mortgage is pretty much a given within the next few months barring a sudden collapse in inflation Buying a house is fighting the fed now. They are trying to quell inflation and will very likely start selling MBS into the market next month to push mortgages rates even higher. Don't fight the fed works both ways. And don't even look at the inflation adjusted home price chart... Hint, they are far above the 2000s peak

nostromo 5y ago

> This will go down as one of the biggest policy mistakes in Fed history. The Fed largely caused the 2008 crisis by underestimating the effects of falling house prices on bank solvency. What's crazy is that all I hear about in the financial press is how the Fed saved the economy after 2008. Conveniently omitted is that their miscalculations also caused the crash. Whenever the Fed talks about finding a soft landing, I get nervous.

adam_arthur 5y ago
The Fed helped create the housing bubble to begin with. Greenspan cut rates massively after dotcom popped and took his sweet time to normalize. Bernanke certainly could have worked with fiscal policy to bring down housing in a controlled way, as it become an out of control snowball. Of course there were many other factors too, government policy encouraging and guaranteeing subprime mortgages, clueless borrowers, faulty credit assessments, too much leverage. IMO the government should seek not to create bubbles and also to set up a structure where it's inherently difficult for them to form. E.g. Limiting leverage for investors/important institutions is an obvious one. A system that relies on participants making smart decisions is doomed to fail in the long run. If buy and hold residential SFH investors were only allowed to lever up to 2x to 1, you would see significantly less speculation in SFH with minimal downside outside of investment returns for those investors. It really doesn't take a lot to set up a safe structure while still leaving it a mostly free market. Just requires foresight and a willingness to curb some of the fun/exuberance in the short run
- socksset 5y ago
  It is hysterical Greenspan gets blamed for this when we have barely been able to keep rates off the floor the past 13 years since he left. https://fred.stlouisfed.org/series/FEDFUNDS https://fred.stlouisfed.org/series/FEDFUNDS If 2002-2004 was keeping rates too low then what do you call the past 14 years?
  - adam_arthur 5y ago
    He cut the funds rate from 6% to 1% pretty much overnight, which was excessive given there was only a mild recession at the time. To his credit he did start ratcheting it up shortly after. Low rate from past decade is for many reasons, high unemployment for most of the 2010s is the main one. Weak fiscal response to 2008 leading to slow recovery. The Fed shouldn't be the tool to try to address impact of a recession, it's much healthier to address through an intelligently crafted fiscal package. But the ease of being able to unilaterally set monetary policy tends to corrupt the Fed's decision making and skew it towards short term problems. All that being said, Greenspan did a hell of a better job than Powell overall

imtringued 5y ago

Speaking of policy mistakes, pretty much "everyone" agrees that raising interest rates now is a policy mistake.

adam_arthur 5y ago
The mistake has already been made. Markets crashing due to raising rates is due to the mistake made last year, and somewhat of an inevitable outcome. Similar to 2000s, Bernanke raised too fast, but the raising should have started years earlier to prevent the need to move so fast Otherwise we may very well end up in the 70s part two. There is not a good way out at this point unless the fiscal drag really is sufficient enough to cool inflation on its own. Which is really looking doubtful at this point. A creative way out would be for the Fed to partner with fiscal policy to enact a new tax scheme or similar which sucks some of the money out without requiring higher rates. But chance of that happening is pretty much 0. It looks like the aim for the BBB has barely changed, and will still be inflationary the way it's proposed. And keep in mind, long rates are market driven. If the Fed slow walk the rate increases, the 10y will just go up faster and faster as expectations of future inflation continue to go higher. There is no way to stop the repricing of the 10y at this point, aside from inflation coming down or more aggressive fed action to prove they are serious