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The Case for Higher Rates

124 points by gw67 4y ago

yborg 4y ago
>In other words, the Fed feels it can continue to juice financial assets and exacerbate wealth inequality so long as the average person doesn’t notice price increases... And the Fed is not quantifying stealth consumer inflation, which people do notice in spend, namely "shrinkflation" where consumer goods manufacturers reduce the amount of corn flakes in the box and hold the price the same. This was a trend happening before the headline inflation number started to move.
- JumpCrisscross 4y ago
  > the Fed is not quantifying stealth consumer inflation The Fed doesn't calculate CPI; BLS does. And they do consider quantity [1]. Mainly to account for quantity discounts. But it takes care of shrinkflation, too. [1] https://www.bls.gov/opub/hom/pdf/cpihom.pdf https://www.bls.gov/opub/hom/pdf/cpihom.pdf
frankbreetz 4y ago
I have heard the case that the Fed can't raise rates due to the high debt to GDP ratio we currently have and this would make the interest payments too high. Is there any truth to that? I am by no means an expert, but this doesn't make sense to me. If the choices are runaway inflation and making higher interest payments and making the debt to GDP ratio worse, the choice seems obvious.
- snake_doc 4y ago
  Technically it is a constraint on monetary policy. But the US is no where close to where it is a concern, and it only usually matters in countries where there is a history of sovereign debt defaults. The US treasury debt is deemed by global financial markets as risk free.
- JumpCrisscross 4y ago
  > the Fed can't raise rates due to the high debt to GDP ratio we currently have and this would make the interest payments too high. Is there any truth to that? No. The Fed is raising rates. They raised rates yesterday. They say they intend to keep doing so through the end of the year. Net interest is a low single digit percent of the federal budget; it's lower as a fraction of GDP than it was in the 90s [1]. Most of the federal debt is fixed rate--raising rates now only affects future borrowing. The real limit on rates is growth and employment. If the economy falters because people are spending all their money on servicing debts over goods and services, we'll see a crunch. That's not happening. The opposite is happening: inflation is surging. [1] https://www.cbo.gov/publication/56910 https://www.cbo.gov/publication/56910
  - ericd 4y ago
    They can and are raising rates, but do you think it’s feasible for them to go full Volcker if that’s what it takes to beat back inflation? When I worry about the debt to GDP ratio, it’s not about whether we can withstand bumping from 0% to 1-2%, it’s whether we can withstand historically normal ranges, let alone what it took in the 80s.
    - JumpCrisscross 4y ago
      > do you think it’s feasible for them to go full Volcker if that’s what it takes to beat back inflation? "US inflation, which peaked at 14.8 percent in March 1980, fell below 3 percent by 1983...Volcker raised the federal funds rate, which had averaged 11.2% in 1979, to a peak of 20% in June 1981" [1]. For comparison, we're currently around 8.5% [2] and 0.75% to 1%, respectively. Long-term rates are below 4% [3]. There is no need to tip the economy into a recession at this time. If we needed to, the constraint would be--as it was in Volcker's time--political. If we were suffering double-digit inflation, I suspect the will would be there. [1] https://en.wikipedia.org/wiki/Paul_Volcker#Chairman_of_the_Federal_Reserve https://en.wikipedia.org/wiki/Paul_Volcker#Chairman_of_the_F... [2] https://fred.stlouisfed.org/graph/?g=rocU https://fred.stlouisfed.org/graph/?g=rocU [3] https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202205 https://home.treasury.gov/resource-center/data-chart-center/...
- chasd00 4y ago
  > I have heard the case that the Fed can't raise rates... i think it's more political. A while back I was driving to pick up my son from a school thing and there was an interview on NPR with the fed. I can't remember the exact date but a number of months ago. The fed was going on and on about how great the Build Back Better plan is and was going to be and now the inflation that was beginning to show was all due to supply chain issues and will be sorted out in a few months. I think the fed didn't want to raise rates and held out this long for political reasons only. Now, not raising rates presents more risk to the administration in power than raising rates and so here we are.
  - gsibble 4y ago
    Indeed. The Fed is supposed to be politically neutral so for them to be supporting one party's major bill is a clear violation of that. And I fully believe they didn't raise rates earlier for political reasons.
    - lotsofpulp 4y ago
      The Fed will never let asset prices fall in general, because it benefits all politicians and most voters to keep them rising. Voters want to see their 401k and IRAs going up, as long as their expenses go up slower.
      - gsibble 4y ago
        The thing is all of those assets are generally only owned by the top 5% (mostly top 1%) of the wealthy, so in reality, the Fed only serves the interests of the wealthy and everyone else gets screwed.
    - AnimalMuppet 4y ago
      The Fed is supposed to be politically neutral, that is, not acting to help one party or the other. But that does not mean that the Fed has no opinion on the effects of big fiscal decisions. It is perfectly within the remit of the Fed for them to suggest that a large amount of Federal spending would currently be a good idea, and that it could usefully be applied to some end.
- landemva 4y ago
  >>> high debt to GDP ratio we currently have and this would make the interest payments too high. USA can you use Federal Reserve to monetize debt at low rates. Europe and others can't. Pensions have been hit hard since 2008 because laddered bonds no longer yield sufficiently. The solution is a worldwide government debt default, with UBI after pensions default. While I don't want this socialism, world politicians seem to follow Klaus Schwab's idea on this.
paulpauper 4y ago
Per the Federal Reserve, total Household Net Worth before COVID-19 was $110 trillion. Two years later on 12/31/21, it clocked in at $150 trillion - a 36% increase - the largest increase ever over such a time period. Isn’t it odd that during a period of economic turmoil, household wealth increased by the most on record? Indeed this strange dichotomy can be understood in large part by low rates and QE. What would explain the increase of household wealth pre-2008, before QE was even invented? The economy was in turmoil for a few months but then everything picked up again. GDP, corporate profits surged. Unemployment fell. Home prices and stocks surged in the 80s and 90s despite high interest rates. The fed raised rates from 0% in early 2016 to 2.5% by late 2018 and the stock market and economy did fine. Correlation does not mean causation, as it's said. 0% interest rates forever didn't help japan until possibly only very recently. why is it suddenly different here.
- jgeada 4y ago
  Nice, but aggregates like this hide the distribution: who got that increase matters, and the distribution is likely extremely lopsided towards the upper extreme. The more you had, the greater your percentage increase.
- onlyrealcuzzo 4y ago
  > What would explain the increase of household wealth pre-2008, before QE was even invented? The economy was in turmoil for a few months but then everything picked up again. The economy was in turmoil in 2007? There were problems at a few banks, but other than that, spending and investment was extremely optimistic. House prices hadn't started to decline, and they were coming off their biggest 6-year increase in a long time. HH wealth was at an all-time high for most of the year.
  - paulpauper 4y ago
    i meant turmoil in 2020 due to coivd.
- flenserboy 4y ago
  Yeah, but that $150T is no longer worth $110T (and that number itself was illusory).
axg11 4y ago
Higher rates are coming, that's certain. Is there any work on estimating what the optimal interest rate is to combat the high inflation that we're seeing? I'm not an economist so perhaps the question doesn't make sense.
- dwater 4y ago
  The Taylor Rule does that. "According to Taylor's original version of the rule, the nominal interest rate should respond to divergences of actual inflation rates from target inflation rates and of actual Gross Domestic Product (GDP) from potential GDP" https://en.wikipedia.org/wiki/Taylor_rule https://en.wikipedia.org/wiki/Taylor_rule Some argue that the reason we have seen such extreme speculative bubbles in recent history is because the Fed has no Taylor Rule-like systemic policy related to market factors. They are free to make policy completely divorced from the market. https://www.ft.com/content/ece92145-443d-4e94-bfa9-7fe06cb9c00a https://www.ft.com/content/ece92145-443d-4e94-bfa9-7fe06cb9c...
- landemva 4y ago
  On loans not backstopped by government, higher rates have been here for at least a year. The Fed rate rise is catching up to rates.
- ItsMonkk 4y ago
  Rates should ideally be set such that the increase(or decrease) of actual productivity matches the increase of the money supply. If people aren't taking enough loans, then the rates should be lowered. If people are taking to much loans, rates should be raised. The Fed's mandate does not do this, and we very often have way to much debt followed by short spikes of not enough debt, so we are destined to continue the boom and bust cycle. The way I see it the major problem happens to be with when we take out debt on zero-sum goods. When you take out debt and create something new with it, and that debt pays off, everything is fine. When you take out debt to buy something like land, it messes up a fundamental balancing force and speculation runs amok.
neilwilson 4y ago
"The reason why I write so frequently about monetary policy is because it is so important." It isn't important. It's been made important by financiers. What the last 50 years have shown is that trying to manage an economy by trying to influence the amount of credit is a fool's errand. Instead we should set that ship free - and leave it up to the private sector to determine interest rates amongst themselves. That means anchoring monetary policy at zero base rates. Instead we should be rationing firms access to labour by pushing for higher wages with a much higher minimum wage and preferably a guaranteed job for all at the higher minimum wage. What we need to make firms efficient is reassuringly expensive labour. That way they will use the cheap access to capital to borrow, invest in technology and drive forward productivity - solely so they can use less of the expensive labour. It's time to get banks, lending, and finance out of the prime path. As the Chinese have.
- zozbot234 4y ago
  It's simply not possible to anchor policy rates to any value. Rates behave according to an unstable equilibrium; when they're too low (i.e. deflation) they tend to go lower; when too high (hyperinflation) they run even higher. It's possible to peg an exchange rate, or the value of a commodity (such as gold) or a basket of goods (such as those used for the CPI), etc. (Currently, policy approximates a crawling peg on the PCE consumption basket, but this is only an approximation.)
- landemva 4y ago
  >>> zero base rates When I take the risk to loan out money, I want more return than zero. Why would anyone bother at zero? Maybe reading the enabling legislation would be useful. https://www.law.cornell.edu/uscode/text/12/225a https://www.law.cornell.edu/uscode/text/12/225a ' maximum employment, stable prices, and moderate long-term interest rates. ' I'm interested in the forgotten 'stable prices' part.
  - chillacy 4y ago
    Lenders add to the base rate so the return is nonzero afaik.
- 4y ago
Reichhardt 4y ago
A major driver of inflation is Baby Boomers retiring. If we want to contain inflation, we should immediately increase the full retirement age to 70 and partial to 65. Secondly, we can immediately ban the purchase of Crytpocurrencies, to drive down the price and hence attractiveness of mining and electricity rates. Government action needs to be at the supply side.
- francisofascii 4y ago
  Fear of inflation could keep people from retiring. Not to mention the "less risky" bonds assets getting hammered recently.
- heylook 4y ago
  > A major driver of inflation is Baby Boomers retiring. What's the mechanism here?
citizenpaul 4y ago
Since the first sentence is factually wrong this article is useless drivel. The FED is not a government. It is a banking organization created to keep the rich, rich. Full Stop.
- etaioinshrdlu 4y ago
  The Federal Reserve was created by the government, https://en.wikipedia.org/wiki/Federal_Reserve_Act https://en.wikipedia.org/wiki/Federal_Reserve_Act , and their leaders are nominated by the US President and confirmed by Congress. However, it is supposed to be independent from the politicians on a day-to-day basis, and people seem to like it that way. I believe you are somewhat wrong in stating the Fed is not government.
  - citizenpaul 4y ago
    Read The Creature from Jekyll Island: A Second Look at the Federal Reserve. Might change your mind about what is arguably the most powerful institution in your life. Admittedly the title alone kind of tells you they have a bias. Edit: Why are you apologizing for people that do not care about you and also rule over your life?
    - Smilliam 4y ago
      I'm not sure that a book by an infamous conspiracy theorist should be taken very seriously regarding "the most powerful institution in your life." As with many things (and conspiracies especially), there may be nuggets of truth buried between the lines, but you're guaranteed to come out of it covered in a lot of excrement.
      - citizenpaul 4y ago
        You are right not reading things and remaining ignorant is much better choice. Head meet sand. Honest question. Why do you think an organization that literally controls money would have the average persons interest in mind in any way whatsoever? Every other aspect of politics is corrupt to the core? Why would this be different?
rsync 4y ago
"What we desperately need today is higher rates, not merely as a temporary measure or to restore a sense of near term credibility, but higher for longer, in order to promote long-term economic vibrancy. In the near term, this will cause economic pain and wealth destruction." There is an apt analogy to be made with forest fires and recessions. You can keep forest fires from erupting for decades - and we have done that in much of the American West. But the fuels continue to build up and, eventually, a fire that cannot be managed will explode violently - and cause much more damage than the aggregate of all of the smaller fires along the way. Business firms fail. Employees of those firms lose their jobs and suppliers are left unpaid. Nobody likes this but it is the circle of life of the economy. Keeping these firms alive with cheap and easy rollover of debt is akin to letting the fuels build up in the forest: when the day finally arrives that these zombie firms cannot finance or rollover debt we will have an explosion of defaults and bankruptcies that consumes far more than the laggards we supported along the way. We need regular recessions the same way we need regular fires in the forest.
- zozbot234 4y ago
  I don't think anything policy does is going to cause a recession. We've got a whole lot of QE to wind down before anything like that happens. If a recession hits now, it's going to be due to supply factors: the aftermath of the pandemic and the global situation more recently. Of course, any move towards sustained inflation is also dangerous; it would be good to avoid that.
  - whimsicalism 4y ago
    The issue is that we might need to contract quite a bit to pull inflation down.
- TimPC 4y ago
  The counterpoint is that we needed higher rates earlier to combat inflation before we had stagflation. My understanding is that with stagflation the better policy is to accept the inflation. Raising interest rates combats inflation but also contracts the economy. Contracting the economy during a recession is extremely dangerous. As in start talking about the D-word dangerous. I think raising interest rates so aggressively now is poorly thought out and is going to bite us in the ass.
gpsx 4y ago
I subscribe to a different take on what has happened to interest rates the last 40 years. I think market driven rates have been going lower and the fed has just responded by lowering their rates. With interest rates so low, money is poring into the stock market driving it up. This is helping the wealthy. But I also think the interest rate problem is caused by wealth inequality, with more invested money chasing fewer productive lending opportunities, and this is because more money is in the hands of savers and less in the hands of spenders. I personally am hoping after the inflation rate comes back down we see larger net wage inflation than price inflation, returning money to the hands of the working class. (Of course, it would be tricky to push for this too much as a policy because we certainly do not want to cause a wage-inflation spiral. I don't think that is a given though. As they say, the best cure for high prices is high prices.)
- formerkrogemp 4y ago
  It's ironic. I've heard so much fear of wage inflation leading to general inflation from some minority of my fellow minimum wage lackeys back in the day. It's unfortunate how often people will vote against their own interests for other unrelated issues.
Workaccount2 4y ago
If you currently work for a tech company that runs on VC cash, the time to look for an established profitable enterprise to work for is yesterday. Raising rates will likely massacre debt dependent companies.
- AnimalMuppet 4y ago
  Is VC cash "debt dependent", though? My impression is that it is not.
  - whoisburbansky 4y ago
    In the sense that public market stock valuations are debt-dependent, because cheaper debt increases future earning potential by making it cheaper to finance operations, acquisitions, expansions. Without the expectation of high public valuations, VC have less incentive to pump cash into early-stage companies. I think that's the rationale?
- kasey_junk 4y ago
  "established profitable enterprise" is not the opposite of "debt dependent" and "company that runs on VC cash" is not synonymous with it. What you really want to be concerned about are enterprises, large or small, established or starting out, that are impacted by first order effects of interest rates. The obvious examples are the mortgage and real estate industries. Second order effects are going to be harder to suss out but companies that have large lag times between production of a product and receipt of cash for that product will be adversely impacted. Companies with costs that are hard to restructure are also problematic because (in the US) getting rid of people can be much easier than getting rid of long term leases or debt in raising rate environments. That is to say, in a raising interest rate environment lots of other items top the list of problematic before VC funding. In fact, it _may_ lead to companies getting more freedom as the VC funds needn't return as much as they do in the current rate environment. As always, keep enough money on hand to ride out a job search, keep your skills sharp and your professional network built is about all that you can say you should do to prepare for changing macroeconomic regimes.
keppy 4y ago
You can't write off all lending that you don't see as "worth it" as a "penny box". We spend money on things like housing and cars because those things empower us to create and forge new paths ahead. Sometimes it's more of a liability we are putting capital in to--but we tell ourselves it's an investment. Likewise lending capital to acquire a company may have societal gains, to say nothing of the long term economic growth that this argument ignores.
mercy_dude 4y ago
Can somebody explain how raising rates can do anything to what really seems like a supply side problem due to COVID and war? If demand weakening by wealth destruction is the way Fed thinks they can get away with a supply side crunch due to years of offshoring then they are basically calling for a recession.
- whichfawkes 4y ago
  The idea is that if there is less supply, you ideally want there to also be less demand. If supply decreases but there's also a ton of cash splashing around, then people try to use it to get things... But there's not enough things, so the price of everything gets bid up. More than 20% of all dollars in existence were "printed" in the last 2 years. This, on it's own, would tend to increase inflation. Combined with supply side issues, we can see how it has definitely increased inflation. Inflation itself is also an issue in terms of making sure the supply side works well. Prices don't go up smoothly and uniformly for everything at once, rather there's chaos and delays as every step of everything gets renegotiated, and a cascade effect from that that causes more disruption. So, you want to deal with inflation, probably. Increased rates mean less money being "created" in the form of credit, which means fewer dollars splashing around, which means fewer dollars to bid up the prices of short supplies, which means lower inflation, theoretically.
  - xenadu02 4y ago
    But the whole idea of a "free market" is that demand should cause new firms to be created and existing firms expanded to serve that demand. We've suffered from an excess of capital desperately seeking profitable investments the past few years. Shouldn't this be an opportunity? To say otherwise is to say the free market doesn't work. Most of inflation right now is being driven by shortages, firm profit taking, and wage increases. The first two can be solved and should be solved by increasing supply and competition. The third is not a problem at all. The capital side has taken the lion's share of productivity increases over the past 30 years and that has certainly impacted consumer's ability to spend. Wage increases are a good thing in this case and will drive further improvements in productivity and automation.
- 4y ago
maerF0x0 4y ago
Discarding that this article is about Fed's nominal rate and instead discussing the general topic of market interest rates. Another reason for higher market interest rates is it's a forcing function on entrepreneurs to make them think harder about what they spend social resources on. Think of it this way with an interest rate of 0* , you merely need to trade a dollar for a dollar in order to service the debt. Many would be entrepreneurs will pursue ideas which have an EROI in the [0-1]% range just because they're expected to return _something_ . However this deploys many societal resources that marginally keeps them from better ideas, should they simply wait or innovate longer. If interest rates were, say, 5% then entrepreneurs must find ways to increase resources by 5% at a minimum just to service the capital. I think this is part of why we've seen so many shitty ideas come from startup over the years. Because a net 0 outcome has minimal repercussions . Yes obviously everyone wants to be a billionaire, but thinking of every gamble having a spectrum of outcomes, it means a gambler can continue to gamble on lower payouts if the "rake" is much lower. * Consider all of this net of inflation and mandatory minimum returns etc. so that we can speak simply about interest rates.
ineedasername 4y ago
Question-- So I'm not a finance quant or anywhere near conversant in the intricacies of finance, so I really don't understand what seems to be an important question: Why do banks have to follow the federal rate for certain types of loans? IIRC the rate is used for interbank loans against federal reserve deposit requirements, but why would they follow the Fed rate for this rather than some other market force? I don't think it's required by statute (is it?). What, if anything, prevents banks from ignoring federal benchmark rates all together?
- wccrawford 4y ago
  Competition? Profit motive? If they go too far one way, people will use other banks. If they go too far the other, they waste money. Also, there comes a point where they could just invest that money in someone else rather than offer the service themselves, and make more money. That keeps things from going too far that direction. And finally... Deciding things is hard. When someone else decides things for everyone, legally, it's an easy choice to follow it. Most of the time that's price fixing and is illegal.
  - djyaz1200 4y ago
    "Most of the time that's price fixing and is illegal." Bingo! That's the answer, the fed funds rate is a price fixing tool. Banks via the federal reserve governors meet to decide the base interest rate from which most other interest rates are derived. Aka the "price" of money. This is done to optimize the rent seeking activity of loans. The banks want to optimize how much interest they extract from the productive economy without harming it to the degree it stops growing or shrinks. Related, most people think the Fed IS the government but it is not... it's banks... https://www.stlouisfed.org/in-plain-english/who-owns-the-federal-reserve-banks https://www.stlouisfed.org/in-plain-english/who-owns-the-fed...
  - ineedasername 4y ago
    So, theoretically, banks could lend at different rates but for various practical reasons they don't?
- 4y ago
vmception 4y ago
> This isn’t populist rhetoric, it’s the Fed’s own data. It's sad the author feels they even need this disclaimer. Its interesting how much gets lumped into a political cause (that requires inheriting all associated political causes of that party).
not2b 4y ago
I'm skeptical of this argument. It has a surface plausibility, but I find it more useful to think like a scientist. Assuming that the hypothesis is true, what would we expect to observe? The claim is that that low interest rates are causing marginal investments to be made, so we would expect to see a lot of "penny boxes", to use the author's term: low-profit activity that's just squeaking by. Business profits should be low. But that's not what we're seeing at all. Profits are high, even after taking inflation into account. There are other arguments for higher interest rates, but the analysis in the article strikes me as too simplistic.
lamontcg 4y ago
The real reason why we're going to get higher rates is that we're now seeing broader wage growth and unionization. And that's the point where inflation will be stopped by policymakers. The asset bubbles that have been blown up were of no real concern because that makes the rich get richer, and is indeed regressive. Now that it looks like wage inflation for the average joe might happen (which is not regressive at all), it suddenly has to be stopped at all cost. But ultimately this will trigger an extraordinarily painful recession/depression in order to accomplish it. There's two ways out of this. One would be to tolerate wage inflation until it caught up with asset price inflation, with rates rising naturally as investor expectations for inflation increased, this would actually produce more stable long term higher interest rates. The other way is for the fed to jack up rates until the economy goes into a recession, throwing a massive number of people out of work and destroying retirement savings for the rest of the bulk of the population and then having asset prices readjust downwards (which must eventually happen). But that latter path won't result in high long term rates since the bond markets will price in the coming recession and that the fed will once again drop rates to zero in the depression (and ultimately we have to eventually hit the "pushing on a string" condition where fed can't even reflate asset bubbles by ZIRP). The very fact that everyone in the managerial class is so terrified of the current inflationary environment is why everyone should be more concerned with the fed slamming on the brakes and the coming disinflationary depression.

124 points by gw67 4y ago

>In other words, the Fed feels it can continue to juice financial assets and exacerbate wealth inequality so long as the average person doesn’t notice price increases... And the Fed is not quantifying stealth consumer inflation, which people do notice in spend, namely "shrinkflation" where consumer goods manufacturers reduce the amount of corn flakes in the box and hold the price the same. This was a trend happening before the headline inflation number started to move.

JumpCrisscross 4y ago
> the Fed is not quantifying stealth consumer inflation The Fed doesn't calculate CPI; BLS does. And they do consider quantity [1]. Mainly to account for quantity discounts. But it takes care of shrinkflation, too. [1] https://www.bls.gov/opub/hom/pdf/cpihom.pdf https://www.bls.gov/opub/hom/pdf/cpihom.pdf

frankbreetz 4y ago

I have heard the case that the Fed can't raise rates due to the high debt to GDP ratio we currently have and this would make the interest payments too high. Is there any truth to that? I am by no means an expert, but this doesn't make sense to me. If the choices are runaway inflation and making higher interest payments and making the debt to GDP ratio worse, the choice seems obvious.

snake_doc 4y ago
Technically it is a constraint on monetary policy. But the US is no where close to where it is a concern, and it only usually matters in countries where there is a history of sovereign debt defaults. The US treasury debt is deemed by global financial markets as risk free.
JumpCrisscross 4y ago
> the Fed can't raise rates due to the high debt to GDP ratio we currently have and this would make the interest payments too high. Is there any truth to that? No. The Fed is raising rates. They raised rates yesterday. They say they intend to keep doing so through the end of the year. Net interest is a low single digit percent of the federal budget; it's lower as a fraction of GDP than it was in the 90s [1]. Most of the federal debt is fixed rate--raising rates now only affects future borrowing. The real limit on rates is growth and employment. If the economy falters because people are spending all their money on servicing debts over goods and services, we'll see a crunch. That's not happening. The opposite is happening: inflation is surging. [1] https://www.cbo.gov/publication/56910 https://www.cbo.gov/publication/56910
- ericd 4y ago
  They can and are raising rates, but do you think it’s feasible for them to go full Volcker if that’s what it takes to beat back inflation? When I worry about the debt to GDP ratio, it’s not about whether we can withstand bumping from 0% to 1-2%, it’s whether we can withstand historically normal ranges, let alone what it took in the 80s.
  - JumpCrisscross 4y ago
    > do you think it’s feasible for them to go full Volcker if that’s what it takes to beat back inflation? "US inflation, which peaked at 14.8 percent in March 1980, fell below 3 percent by 1983...Volcker raised the federal funds rate, which had averaged 11.2% in 1979, to a peak of 20% in June 1981" [1]. For comparison, we're currently around 8.5% [2] and 0.75% to 1%, respectively. Long-term rates are below 4% [3]. There is no need to tip the economy into a recession at this time. If we needed to, the constraint would be--as it was in Volcker's time--political. If we were suffering double-digit inflation, I suspect the will would be there. [1] https://en.wikipedia.org/wiki/Paul_Volcker#Chairman_of_the_Federal_Reserve https://en.wikipedia.org/wiki/Paul_Volcker#Chairman_of_the_F... [2] https://fred.stlouisfed.org/graph/?g=rocU https://fred.stlouisfed.org/graph/?g=rocU [3] https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202205 https://home.treasury.gov/resource-center/data-chart-center/...
chasd00 4y ago
> I have heard the case that the Fed can't raise rates... i think it's more political. A while back I was driving to pick up my son from a school thing and there was an interview on NPR with the fed. I can't remember the exact date but a number of months ago. The fed was going on and on about how great the Build Back Better plan is and was going to be and now the inflation that was beginning to show was all due to supply chain issues and will be sorted out in a few months. I think the fed didn't want to raise rates and held out this long for political reasons only. Now, not raising rates presents more risk to the administration in power than raising rates and so here we are.
- gsibble 4y ago
  Indeed. The Fed is supposed to be politically neutral so for them to be supporting one party's major bill is a clear violation of that. And I fully believe they didn't raise rates earlier for political reasons.
  - lotsofpulp 4y ago
    The Fed will never let asset prices fall in general, because it benefits all politicians and most voters to keep them rising. Voters want to see their 401k and IRAs going up, as long as their expenses go up slower.
    - gsibble 4y ago
      The thing is all of those assets are generally only owned by the top 5% (mostly top 1%) of the wealthy, so in reality, the Fed only serves the interests of the wealthy and everyone else gets screwed.
  - AnimalMuppet 4y ago
    The Fed is supposed to be politically neutral, that is, not acting to help one party or the other. But that does not mean that the Fed has no opinion on the effects of big fiscal decisions. It is perfectly within the remit of the Fed for them to suggest that a large amount of Federal spending would currently be a good idea, and that it could usefully be applied to some end.
landemva 4y ago
>>> high debt to GDP ratio we currently have and this would make the interest payments too high. USA can you use Federal Reserve to monetize debt at low rates. Europe and others can't. Pensions have been hit hard since 2008 because laddered bonds no longer yield sufficiently. The solution is a worldwide government debt default, with UBI after pensions default. While I don't want this socialism, world politicians seem to follow Klaus Schwab's idea on this.

paulpauper 4y ago

Per the Federal Reserve, total Household Net Worth before COVID-19 was $110 trillion. Two years later on 12/31/21, it clocked in at $150 trillion - a 36% increase - the largest increase ever over such a time period. Isn’t it odd that during a period of economic turmoil, household wealth increased by the most on record? Indeed this strange dichotomy can be understood in large part by low rates and QE. What would explain the increase of household wealth pre-2008, before QE was even invented? The economy was in turmoil for a few months but then everything picked up again. GDP, corporate profits surged. Unemployment fell. Home prices and stocks surged in the 80s and 90s despite high interest rates. The fed raised rates from 0% in early 2016 to 2.5% by late 2018 and the stock market and economy did fine. Correlation does not mean causation, as it's said. 0% interest rates forever didn't help japan until possibly only very recently. why is it suddenly different here.

jgeada 4y ago
Nice, but aggregates like this hide the distribution: who got that increase matters, and the distribution is likely extremely lopsided towards the upper extreme. The more you had, the greater your percentage increase.
onlyrealcuzzo 4y ago
> What would explain the increase of household wealth pre-2008, before QE was even invented? The economy was in turmoil for a few months but then everything picked up again. The economy was in turmoil in 2007? There were problems at a few banks, but other than that, spending and investment was extremely optimistic. House prices hadn't started to decline, and they were coming off their biggest 6-year increase in a long time. HH wealth was at an all-time high for most of the year.
- paulpauper 4y ago
  i meant turmoil in 2020 due to coivd.
flenserboy 4y ago
Yeah, but that $150T is no longer worth $110T (and that number itself was illusory).

axg11 4y ago

Higher rates are coming, that's certain. Is there any work on estimating what the optimal interest rate is to combat the high inflation that we're seeing? I'm not an economist so perhaps the question doesn't make sense.

dwater 4y ago
The Taylor Rule does that. "According to Taylor's original version of the rule, the nominal interest rate should respond to divergences of actual inflation rates from target inflation rates and of actual Gross Domestic Product (GDP) from potential GDP" https://en.wikipedia.org/wiki/Taylor_rule https://en.wikipedia.org/wiki/Taylor_rule Some argue that the reason we have seen such extreme speculative bubbles in recent history is because the Fed has no Taylor Rule-like systemic policy related to market factors. They are free to make policy completely divorced from the market. https://www.ft.com/content/ece92145-443d-4e94-bfa9-7fe06cb9c00a https://www.ft.com/content/ece92145-443d-4e94-bfa9-7fe06cb9c...
landemva 4y ago
On loans not backstopped by government, higher rates have been here for at least a year. The Fed rate rise is catching up to rates.
ItsMonkk 4y ago
Rates should ideally be set such that the increase(or decrease) of actual productivity matches the increase of the money supply. If people aren't taking enough loans, then the rates should be lowered. If people are taking to much loans, rates should be raised. The Fed's mandate does not do this, and we very often have way to much debt followed by short spikes of not enough debt, so we are destined to continue the boom and bust cycle. The way I see it the major problem happens to be with when we take out debt on zero-sum goods. When you take out debt and create something new with it, and that debt pays off, everything is fine. When you take out debt to buy something like land, it messes up a fundamental balancing force and speculation runs amok.

neilwilson 4y ago

"The reason why I write so frequently about monetary policy is because it is so important." It isn't important. It's been made important by financiers. What the last 50 years have shown is that trying to manage an economy by trying to influence the amount of credit is a fool's errand. Instead we should set that ship free - and leave it up to the private sector to determine interest rates amongst themselves. That means anchoring monetary policy at zero base rates. Instead we should be rationing firms access to labour by pushing for higher wages with a much higher minimum wage and preferably a guaranteed job for all at the higher minimum wage. What we need to make firms efficient is reassuringly expensive labour. That way they will use the cheap access to capital to borrow, invest in technology and drive forward productivity - solely so they can use less of the expensive labour. It's time to get banks, lending, and finance out of the prime path. As the Chinese have.

zozbot234 4y ago
It's simply not possible to anchor policy rates to any value. Rates behave according to an unstable equilibrium; when they're too low (i.e. deflation) they tend to go lower; when too high (hyperinflation) they run even higher. It's possible to peg an exchange rate, or the value of a commodity (such as gold) or a basket of goods (such as those used for the CPI), etc. (Currently, policy approximates a crawling peg on the PCE consumption basket, but this is only an approximation.)
landemva 4y ago
>>> zero base rates When I take the risk to loan out money, I want more return than zero. Why would anyone bother at zero? Maybe reading the enabling legislation would be useful. https://www.law.cornell.edu/uscode/text/12/225a https://www.law.cornell.edu/uscode/text/12/225a ' maximum employment, stable prices, and moderate long-term interest rates. ' I'm interested in the forgotten 'stable prices' part.
- chillacy 4y ago
  Lenders add to the base rate so the return is nonzero afaik.
4y ago

Reichhardt 4y ago

A major driver of inflation is Baby Boomers retiring. If we want to contain inflation, we should immediately increase the full retirement age to 70 and partial to 65. Secondly, we can immediately ban the purchase of Crytpocurrencies, to drive down the price and hence attractiveness of mining and electricity rates. Government action needs to be at the supply side.

francisofascii 4y ago
Fear of inflation could keep people from retiring. Not to mention the "less risky" bonds assets getting hammered recently.
heylook 4y ago
> A major driver of inflation is Baby Boomers retiring. What's the mechanism here?

citizenpaul 4y ago

Since the first sentence is factually wrong this article is useless drivel. The FED is not a government. It is a banking organization created to keep the rich, rich. Full Stop.

etaioinshrdlu 4y ago
The Federal Reserve was created by the government, https://en.wikipedia.org/wiki/Federal_Reserve_Act https://en.wikipedia.org/wiki/Federal_Reserve_Act , and their leaders are nominated by the US President and confirmed by Congress. However, it is supposed to be independent from the politicians on a day-to-day basis, and people seem to like it that way. I believe you are somewhat wrong in stating the Fed is not government.
- citizenpaul 4y ago
  Read The Creature from Jekyll Island: A Second Look at the Federal Reserve. Might change your mind about what is arguably the most powerful institution in your life. Admittedly the title alone kind of tells you they have a bias. Edit: Why are you apologizing for people that do not care about you and also rule over your life?
  - Smilliam 4y ago
    I'm not sure that a book by an infamous conspiracy theorist should be taken very seriously regarding "the most powerful institution in your life." As with many things (and conspiracies especially), there may be nuggets of truth buried between the lines, but you're guaranteed to come out of it covered in a lot of excrement.
    - citizenpaul 4y ago
      You are right not reading things and remaining ignorant is much better choice. Head meet sand. Honest question. Why do you think an organization that literally controls money would have the average persons interest in mind in any way whatsoever? Every other aspect of politics is corrupt to the core? Why would this be different?

rsync 4y ago

"What we desperately need today is higher rates, not merely as a temporary measure or to restore a sense of near term credibility, but higher for longer, in order to promote long-term economic vibrancy. In the near term, this will cause economic pain and wealth destruction." There is an apt analogy to be made with forest fires and recessions. You can keep forest fires from erupting for decades - and we have done that in much of the American West. But the fuels continue to build up and, eventually, a fire that cannot be managed will explode violently - and cause much more damage than the aggregate of all of the smaller fires along the way. Business firms fail. Employees of those firms lose their jobs and suppliers are left unpaid. Nobody likes this but it is the circle of life of the economy. Keeping these firms alive with cheap and easy rollover of debt is akin to letting the fuels build up in the forest: when the day finally arrives that these zombie firms cannot finance or rollover debt we will have an explosion of defaults and bankruptcies that consumes far more than the laggards we supported along the way. We need regular recessions the same way we need regular fires in the forest.

zozbot234 4y ago
I don't think anything policy does is going to cause a recession. We've got a whole lot of QE to wind down before anything like that happens. If a recession hits now, it's going to be due to supply factors: the aftermath of the pandemic and the global situation more recently. Of course, any move towards sustained inflation is also dangerous; it would be good to avoid that.
- whimsicalism 4y ago
  The issue is that we might need to contract quite a bit to pull inflation down.
TimPC 4y ago
The counterpoint is that we needed higher rates earlier to combat inflation before we had stagflation. My understanding is that with stagflation the better policy is to accept the inflation. Raising interest rates combats inflation but also contracts the economy. Contracting the economy during a recession is extremely dangerous. As in start talking about the D-word dangerous. I think raising interest rates so aggressively now is poorly thought out and is going to bite us in the ass.

gpsx 4y ago

I subscribe to a different take on what has happened to interest rates the last 40 years. I think market driven rates have been going lower and the fed has just responded by lowering their rates. With interest rates so low, money is poring into the stock market driving it up. This is helping the wealthy. But I also think the interest rate problem is caused by wealth inequality, with more invested money chasing fewer productive lending opportunities, and this is because more money is in the hands of savers and less in the hands of spenders. I personally am hoping after the inflation rate comes back down we see larger net wage inflation than price inflation, returning money to the hands of the working class. (Of course, it would be tricky to push for this too much as a policy because we certainly do not want to cause a wage-inflation spiral. I don't think that is a given though. As they say, the best cure for high prices is high prices.)

formerkrogemp 4y ago
It's ironic. I've heard so much fear of wage inflation leading to general inflation from some minority of my fellow minimum wage lackeys back in the day. It's unfortunate how often people will vote against their own interests for other unrelated issues.

Workaccount2 4y ago

If you currently work for a tech company that runs on VC cash, the time to look for an established profitable enterprise to work for is yesterday. Raising rates will likely massacre debt dependent companies.

AnimalMuppet 4y ago
Is VC cash "debt dependent", though? My impression is that it is not.
- whoisburbansky 4y ago
  In the sense that public market stock valuations are debt-dependent, because cheaper debt increases future earning potential by making it cheaper to finance operations, acquisitions, expansions. Without the expectation of high public valuations, VC have less incentive to pump cash into early-stage companies. I think that's the rationale?
kasey_junk 4y ago
"established profitable enterprise" is not the opposite of "debt dependent" and "company that runs on VC cash" is not synonymous with it. What you really want to be concerned about are enterprises, large or small, established or starting out, that are impacted by first order effects of interest rates. The obvious examples are the mortgage and real estate industries. Second order effects are going to be harder to suss out but companies that have large lag times between production of a product and receipt of cash for that product will be adversely impacted. Companies with costs that are hard to restructure are also problematic because (in the US) getting rid of people can be much easier than getting rid of long term leases or debt in raising rate environments. That is to say, in a raising interest rate environment lots of other items top the list of problematic before VC funding. In fact, it _may_ lead to companies getting more freedom as the VC funds needn't return as much as they do in the current rate environment. As always, keep enough money on hand to ride out a job search, keep your skills sharp and your professional network built is about all that you can say you should do to prepare for changing macroeconomic regimes.

keppy 4y ago

You can't write off all lending that you don't see as "worth it" as a "penny box". We spend money on things like housing and cars because those things empower us to create and forge new paths ahead. Sometimes it's more of a liability we are putting capital in to--but we tell ourselves it's an investment. Likewise lending capital to acquire a company may have societal gains, to say nothing of the long term economic growth that this argument ignores.

mercy_dude 4y ago

Can somebody explain how raising rates can do anything to what really seems like a supply side problem due to COVID and war? If demand weakening by wealth destruction is the way Fed thinks they can get away with a supply side crunch due to years of offshoring then they are basically calling for a recession.

whichfawkes 4y ago
The idea is that if there is less supply, you ideally want there to also be less demand. If supply decreases but there's also a ton of cash splashing around, then people try to use it to get things... But there's not enough things, so the price of everything gets bid up. More than 20% of all dollars in existence were "printed" in the last 2 years. This, on it's own, would tend to increase inflation. Combined with supply side issues, we can see how it has definitely increased inflation. Inflation itself is also an issue in terms of making sure the supply side works well. Prices don't go up smoothly and uniformly for everything at once, rather there's chaos and delays as every step of everything gets renegotiated, and a cascade effect from that that causes more disruption. So, you want to deal with inflation, probably. Increased rates mean less money being "created" in the form of credit, which means fewer dollars splashing around, which means fewer dollars to bid up the prices of short supplies, which means lower inflation, theoretically.
- xenadu02 4y ago
  But the whole idea of a "free market" is that demand should cause new firms to be created and existing firms expanded to serve that demand. We've suffered from an excess of capital desperately seeking profitable investments the past few years. Shouldn't this be an opportunity? To say otherwise is to say the free market doesn't work. Most of inflation right now is being driven by shortages, firm profit taking, and wage increases. The first two can be solved and should be solved by increasing supply and competition. The third is not a problem at all. The capital side has taken the lion's share of productivity increases over the past 30 years and that has certainly impacted consumer's ability to spend. Wage increases are a good thing in this case and will drive further improvements in productivity and automation.
4y ago

maerF0x0 4y ago

Discarding that this article is about Fed's nominal rate and instead discussing the general topic of market interest rates. Another reason for higher market interest rates is it's a forcing function on entrepreneurs to make them think harder about what they spend social resources on. Think of it this way with an interest rate of 0* , you merely need to trade a dollar for a dollar in order to service the debt. Many would be entrepreneurs will pursue ideas which have an EROI in the [0-1]% range just because they're expected to return _something_ . However this deploys many societal resources that marginally keeps them from better ideas, should they simply wait or innovate longer. If interest rates were, say, 5% then entrepreneurs must find ways to increase resources by 5% at a minimum just to service the capital. I think this is part of why we've seen so many shitty ideas come from startup over the years. Because a net 0 outcome has minimal repercussions . Yes obviously everyone wants to be a billionaire, but thinking of every gamble having a spectrum of outcomes, it means a gambler can continue to gamble on lower payouts if the "rake" is much lower. * Consider all of this net of inflation and mandatory minimum returns etc. so that we can speak simply about interest rates.

ineedasername 4y ago

Question-- So I'm not a finance quant or anywhere near conversant in the intricacies of finance, so I really don't understand what seems to be an important question: Why do banks have to follow the federal rate for certain types of loans? IIRC the rate is used for interbank loans against federal reserve deposit requirements, but why would they follow the Fed rate for this rather than some other market force? I don't think it's required by statute (is it?). What, if anything, prevents banks from ignoring federal benchmark rates all together?

wccrawford 4y ago
Competition? Profit motive? If they go too far one way, people will use other banks. If they go too far the other, they waste money. Also, there comes a point where they could just invest that money in someone else rather than offer the service themselves, and make more money. That keeps things from going too far that direction. And finally... Deciding things is hard. When someone else decides things for everyone, legally, it's an easy choice to follow it. Most of the time that's price fixing and is illegal.
- djyaz1200 4y ago
  "Most of the time that's price fixing and is illegal." Bingo! That's the answer, the fed funds rate is a price fixing tool. Banks via the federal reserve governors meet to decide the base interest rate from which most other interest rates are derived. Aka the "price" of money. This is done to optimize the rent seeking activity of loans. The banks want to optimize how much interest they extract from the productive economy without harming it to the degree it stops growing or shrinks. Related, most people think the Fed IS the government but it is not... it's banks... https://www.stlouisfed.org/in-plain-english/who-owns-the-federal-reserve-banks https://www.stlouisfed.org/in-plain-english/who-owns-the-fed...
- ineedasername 4y ago
  So, theoretically, banks could lend at different rates but for various practical reasons they don't?
4y ago

vmception 4y ago

> This isn’t populist rhetoric, it’s the Fed’s own data. It's sad the author feels they even need this disclaimer. Its interesting how much gets lumped into a political cause (that requires inheriting all associated political causes of that party).

not2b 4y ago

I'm skeptical of this argument. It has a surface plausibility, but I find it more useful to think like a scientist. Assuming that the hypothesis is true, what would we expect to observe? The claim is that that low interest rates are causing marginal investments to be made, so we would expect to see a lot of "penny boxes", to use the author's term: low-profit activity that's just squeaking by. Business profits should be low. But that's not what we're seeing at all. Profits are high, even after taking inflation into account. There are other arguments for higher interest rates, but the analysis in the article strikes me as too simplistic.

lamontcg 4y ago

The real reason why we're going to get higher rates is that we're now seeing broader wage growth and unionization. And that's the point where inflation will be stopped by policymakers. The asset bubbles that have been blown up were of no real concern because that makes the rich get richer, and is indeed regressive. Now that it looks like wage inflation for the average joe might happen (which is not regressive at all), it suddenly has to be stopped at all cost. But ultimately this will trigger an extraordinarily painful recession/depression in order to accomplish it. There's two ways out of this. One would be to tolerate wage inflation until it caught up with asset price inflation, with rates rising naturally as investor expectations for inflation increased, this would actually produce more stable long term higher interest rates. The other way is for the fed to jack up rates until the economy goes into a recession, throwing a massive number of people out of work and destroying retirement savings for the rest of the bulk of the population and then having asset prices readjust downwards (which must eventually happen). But that latter path won't result in high long term rates since the bond markets will price in the coming recession and that the fed will once again drop rates to zero in the depression (and ultimately we have to eventually hit the "pushing on a string" condition where fed can't even reflate asset bubbles by ZIRP). The very fact that everyone in the managerial class is so terrified of the current inflationary environment is why everyone should be more concerned with the fed slamming on the brakes and the coming disinflationary depression.