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Federal Reserve to increase interest rates by 75 basis points

167 points by scrlk 4y ago

dustingetz 4y ago
what does this mean/imply: > In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities
- 88913527 4y ago
  In short, it means this line will go down: https://fred.stlouisfed.org/series/WALCL https://fred.stlouisfed.org/series/WALCL You can see it went up substantially in 2020 and 2021.
  - WebbWeaver 4y ago
    And 2008 (without going back down). The component from 2008 AFAIK is mostly the mortgage backed securities. I don't endorse everything this guy is saying but it is an interesting article https://www.axios.com/2022/05/18/fed-mortgage-portfolio https://www.axios.com/2022/05/18/fed-mortgage-portfolio
- datalopers 4y ago
  The fed has been keeping the prices of these artificially inflated through QE. They've stopped buying (they aren't selling yet, but simply letting securities mature) and the massive reduce in demand leads to a decline in prices of the corresponding assets.
  - dragonwriter 4y ago
    > The fed has been keeping the prices of these artificially inflated through QE No, as the word “continue” implies, it has been, and plans to go on with, keeping the prices artificially low via Quantitative Tightening. QE ended a while back.
    - datalopers 4y ago
      QE4 ended in March '22. I'm not sure the particular nuances of the timeline matter to the person asking the question.
- kloch 4y ago
  Currently, it means they will continue to let some small part of the securities the Fed hold on their balance sheet mature without immediately re-investing the proceeds. Outright sales of these securities are another option that they seem reluctant to do at this point. Either way this has the effect of reducing the amount of money in the system (the opposite of QE where they created money out of thin air to buy the securities in the first place).
- deleted 4y ago
  [deleted]
- cpitman 4y ago
  During the pandemic (and also during the response to 2008 recession) the Fed has been injecting cash into the market by buying Treasury securities and mortgage-backed securities. This is what "Quantitative Easing" is, and is a relatively new tool used by the Fed that they started leaning on when interest rates really could not go much lower. (https://en.wikipedia.org/wiki/Quantitative_easing https://en.wikipedia.org/wiki/Quantitative_easing) Now the Fed has a really large backlog of these securities, and they are starting to unwind that by selling those securities off, effectively removing cash from the economy and slowing down economic activity (and therefore hopefully inflation).
- chomp 4y ago
  https://www.federalreserve.gov/newsevents/pressreleases/monetary20220126c.htm https://www.federalreserve.gov/newsevents/pressreleases/mone... https://www.federalreserve.gov/newsevents/pressreleases/monetary20220504b.htm https://www.federalreserve.gov/newsevents/pressreleases/mone... The Federal Reserve has been working for the past few months agreeing on a plan to reduce the balance sheet. They are just saying that they are still continuing this work.
- HillRat 4y ago
  This is what's called "open market operations," and it's basically the first echelon of attack on inflation. If the Fed sells government (and government agency) securities, then banks buy them, returning money to the Treasury and reducing the banks' lending liquidity. By reducing the money supply, the Fed can put a brake on inflation. The overall implication is that the Fed either wants a sharp anti-inflationary shock, or believes that longer-run secular inflation is in the cards, and is willing to cool the economy to manage that risk.
  - wincy 4y ago
    Do the banks have to buy them? Why do they buy them? Wouldn’t the bank have an advantage if it had liquidity when nobody else does?
    - redblacktree 4y ago
      The banks buy them for the risk-free return.
      - wincy 4y ago
        That makes sense. If the US government defaults on their debt the bank has more important things to worry about.
- csense 4y ago
  The linked Implementation Note says $60B / month of Treasury and $17.5B / month of MBS, with the latter doubling to $35B / month in September. The Implementation Note says it only applies as principal is paid, so this is an upper bound. According to the maturity distribution at https://www.federalreserve.gov/releases/h41/ https://www.federalreserve.gov/releases/h41/ the Fed has effectively all of its MBS with maturity > 1 year, with the vast majority over 10 years. AFAIK we don't have any other maturity information that "over 10 years", but I might assume it's 20 years on average because it's uniformly distributed between 10-30 years (AFAIK 30 years is typically the max mortgage time in the US). Dividing $2.7 trillion by 240 months gives $11.25 billion per month. Which implies an increase of the cap from $17.5B to $35B is a no-op, as rollover would already be maxed a little over $11B. So why bother? Any bond / Fed experts able to shine a light on what's wrong with my numbers?
satao 4y ago
damn, inflation in my country will be crazy after this. our gas prices are already really high (the government had to subsidize it until the end of the year to have a chance of being reelected). now probably this crazy politic will be nullified since the dollar will get more expensive
- alexb_ 4y ago
  Dollars becoming more expensive is the exact opposite of inflation. ok I get it they don't live in the US don't need 8 people all posting at the same time to tell me this
  - lampshades 4y ago
    Not for other countries that have to print more of their own currency to try and afford more dollars.
    - notch656a 4y ago
      How would printing more foreign currency make their total dollar-measured goods/services/estate that people actually want to trade dollars for any different in terms of dollars?
  - kube-system 4y ago
    Yeah, if you get paid in dollars. I assume by the phrasing of the comment that is not the case.
  - pkulak 4y ago
    No, that's what happens when your currency inflates. It's all relative.
  - selectodude 4y ago
    Not when it becomes far more expensive in your home currency to buy dollars.
  - jsnell 4y ago
zamalek 4y ago
Very good. This is going to hurt quite a bit, but is going to prevent real pain in the long run. Much like something we should have all done a year ago.
- nimbius 4y ago
  I think you're right, but I'm a little pessimistic after covid relief and the 08 crash. we have 9.1℅ inflation and the damage control from the reigning party trying to explain away an obvious recession makes quarter point increases seem like performance art. student loans are already such an untenable debt bubble that the same potus that stumped for their perpetuity is now forgiving them. auto loans are an equally prime disaster waiting to happen as their average term is now 72 months and the average monthly payment is $700
  - heartbreak 4y ago
    The President is hardly forgiving student loans. So far the government has only forgiven loans of students who went to scam schools.
    - deleted 4y ago
      [deleted]
- icedchai 4y ago
  We need to realize rates are still quite low. To put it in perspective, we're finally back to 2019 levels. There's still a long way to go to get back to 2005 (5%-ish rates).
- paulpauper 4y ago
  A year ago the economy was still in the grip of covid. no one expected things to recover so fast from such a huge crisis like covid. Thing went from "the world is coming to an end" to new highs just 7 months later. that's nuts.
pdonis 4y ago
Is 75 basis points correct? The actual press release appears to describe an increase from 2-1/4 percent to 2-1/2 percent, which is only 25 basis points. It says it "anticipates that ongoing changes in the target range will be appropriate", but that's not the same as making additional changes now.
- datalopers 4y ago
  https://www.newyorkfed.org/markets/reference-rates/effr https://www.newyorkfed.org/markets/reference-rates/effr It was 1.50 - 1.75 before.
  - pdonis 4y ago
    Ah, I see, the release says to 2-1/4 to 2-1/2 percent.
- alexb_ 4y ago
  Interest rates are not a single set percent, they are in a range IIRC. So it's going from 1.5-1.75 to 2.25-2.5, a 75 basis point increase.
- deleted 4y ago
  [deleted]
01100011 4y ago
Funny that this would rocket to the front page so quickly. Shows where everyone's minds are at. A lot of folks were banking on a pivot by the fed but they failed to understand how seriously the fed now sees inflation. Sure, the fed could/should have raised even higher, but consider they need to orchestrate a less disruptive start to our next recession. They're still doing QT as well, which will also help tame inflation.
- 88913527 4y ago
  The Fed does a very good job at setting market expectations. If it sees the market is mis-aligned with its thinking, it will use soft policy tools like interviews and public statements (outside of more formal options, like regularly scheduled official FOMC press releases) to bring the market to its expectations. Markets priced a greater than 3-in-4 chance of a 75 basis point increase, which was the decision: https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html https://www.cmegroup.com/trading/interest-rates/countdown-to... In the preceding weeks, especially after the latest inflation report came out, markets began pricing a ~90% chance of a 100 basis point increase. Then came out the interviews to steer markets back to 75.
- aresant 4y ago
  The stock market is usually the best indicator of investor sentiment - the consensus was a 75 bps increase, that's what the market got, and as a result the market sustained gains from today. https://finance.yahoo.com/news/stock-market-news-live-updates-july-27-2022-113235652.html https://finance.yahoo.com/news/stock-market-news-live-update...
  - 01100011 4y ago
    We'll see where the market settles in a few days. I wouldn't read too much into today's price action. You're seeing a lot of options action in a low volume market. We're not even done with a big earnings week(cough, AAPL, cough).
- bhahn 4y ago
  > Funny that this would rocket to the front page so quickly. Shows where everyone's minds are at. I don't find this so surprising. Inflation (and rates as a consequence) has been affecting a good number of people directly or indirectly (cost of goods/gas, stocks, layoffs, etc).
nodesocket 4y ago
Now if we can only get states (like California) to stop giving out stimulus payments (they literally calling it inflation stimulus; learn economics 101) and drop student debt forgiveness nonsense. The fed is trying to curb inflation, while politicians are trying to get re-elected at any cost, fighting the fed.
- lampshades 4y ago
  California doesn’t have a central bank, so it’s not like it can print money out of thin air like the Federal Reserve. If they’re giving out stimulus, they must be getting it from tax payers, right?
  - kube-system 4y ago
    Technically speaking, not all state government revenue is tax revenue; states can issue bonds or other debt
    - count 4y ago
      Which is repaid via?
      - kube-system 4y ago
        Issuing more debt? :)
    - lampshades 4y ago
      But someone has to buy the bonds if they want to give out the stimulus as dollars. What are they doing in California? I haven’t been paying attention.
      - milkshakes 4y ago
        they have a budget surplus
fenek 4y ago
I don't get it. The price of gas I'm paying in the US, has dropped by 20% in the last month or so. That seems to indicate that prices are going back to normal. What prices is fed concerned about?
- boringg 4y ago
  Gas isn't the only thing that is responsible for inflation it's only part of the equation.
- erellsworth 4y ago
  The price of labor. Their goal is to suppress wages. Gotta put workers back in their place or the whole system collapses.
  - just_steve_h 4y ago
    Which is also why there's bipartisan consensus on giving lots more money to police and the military. After all, someone has to control the violent rabble as they are priced out of decent living!
    - vorpalhex 4y ago
      The wealthy can afford private security. Crime mostly hurts less fortunate people and has had a significant jump: https://abcnews.go.com/US/12-major-us-cities-top-annual-homicide-records/story?id=81466453 https://abcnews.go.com/US/12-major-us-cities-top-annual-homi... In terms of military spending, you may have heard of an illegal invasion and war happening in Eastern Europe...
  - JumpCrisscross 4y ago
    Broadly speaking, if complaints oscillate between the central bank punishing savers one year and workers the other, that bank is doing something right.
  - vorpalhex 4y ago
    Inflation hurts labor, not the wealthy. Bill Gates doesn't care if his groceries are 10% more expensive. Inflation is outpacing wage increases so effective wages are actually lower in terms of buying power. Housing is getting more expensive at a faster rate than wages are increasing. If you are pro-labor you want the fed to aggressively raise rates because that makes life harder for business.
UncleOxidant 4y ago
Still a very low rate by historic standards. We've got a ways to go.
- tdhz77 4y ago
  It was about 6.5% in the 1998 recession and 5.25% in the 2007 great recession. It's unlikely we will head into a recession anytime soon. Numbers are all over the place, but I see most of it as temporary (Covid, Gas Prices) and not structural or risky behavior from investment banks in 2007. Remind me if I'm wrong, but I think inflation will drastically drop next report.
  - peterlk 4y ago
    > not structural or risky behavior from investment banks in 2007 I don't see it that way at all. Over the last couple years, we've seen an explosion in private capital investments, NFT and crypto fads (questionable, but I would argue that these were large enough to be considered structural), greatly increasing home prices, supply chain disruptions, the war in ukraine (and all its knock-on effects). Things are a bit topsy-turvy, and I am hesitant to write off all of these things as "not structural".
    - tdhz77 4y ago
      The values of homes went up during the pandemic because people were in their homes. The extra savings of not going out to eat, vacations, etc.. enabled people to reason that paying for more of a house to fit their work from home lifestyles worth it. When you add that plus the historically low interest rate it was a tour-de-force. You might be on to something that it might be more structural now than how I originally thought. People are locked in homes that might be another housing crises, and if we start having job loss we could see something ugly like 2007. Again, I remain hopeful that salaries are up and unemployment is low. On the positive side, the US is better off inflation-wise in the United States than in Europe.
    - Enginerrrd 4y ago
      The only structural issue I'm concerned about is years of cheap debt. As a result we've seen a lot of growth in debt across individuals, corporations, and governments, and I wonder what happens when we reach a point where debt simply stops growing significantly.
mywittyname 4y ago
I'm skeptical that interest rate hikes will curb inflation. I'm even skeptical that a recession will curb inflation. We have significant shortages of so many products and services that people rely on and the only way I see the situation improving is if supplies increase, maybe dramatically. It's too difficult to curb demand for things like food and housing if the population is growing. Those are things we just need to make more of. And I don't think raising interest rates is going to spur housing starts or investment in production capabilities.
- seibelj 4y ago
  It's almost like you are encouraging supply side economics... aka... trickle down We need to massively cut corporate taxes, investment taxes, regulations, and all manner of things to increase supply. The government has been attacking business for so long we are in quite the hole.
  - waythenewsgoes 4y ago
    This doesn't work, when we tried this most recently all it did was increase stock buybacks by large corps. It's just effectively a wealth transfer to those already at the top of the food chain.
    - bronco21016 4y ago
      This exactly. Look at airlines. They lit tens of billions on fire in stock buy backs rather than pouring it into their businesses from 2015-2020. Who got the first corporate handouts when COVID decimated travel? Individual actors will act in their best interest according to the incentive structure in place.
      - landemva 4y ago
        USA handouts of money to airlines and foreign cruise ship operators was disgusting. Americans are soft and didn't do anything about it.
  - 4y ago
colinsane 4y ago
anyone know of bullet-proof analyses into central banking policy out there? after dealing with crypto projects that offer high interest rates, and do so by just inflating their token supply, fed policy seems magical to me. the fed’s offering you yield on your dollars, and that yield comes from printing new dollars (right? there’s no tax increase as part of this announcement). your share of dollars stays constant. so why is it that paying nominal interest on dollars makes people want to buy and hold onto them? how is it that inflating the supply via this one particular method strengthens the dollar? how do you model these things?
- seibelj 4y ago
  All fiat currencies are backed by the USD. All commodities that matter are priced in USD. Countries must acquire USD to buy oil. Therefore we increase interest rates, makes USD-denominated debt harder to manage, increases demand for dollars, weakens other fiat currencies, dollar is strengthened. What USA business can do now is swoop in and buy all foreign capital assets at pennies on the dollar. Go to Sri Lanka and buy whatever factories and industrial capacity they have. Emerging market crashes are great for the USD money printing country.
  - boppo1 4y ago
    >Countries must acquire USD to buy oil Not anymore!
- bjt 4y ago
  The Federal Reserve doesn't print money. The Treasury does that. The Fed does two things: 1. They lend money to banks through what's called their "discount window". https://en.wikipedia.org/wiki/Discount_window https://en.wikipedia.org/wiki/Discount_window 2. They buy and sell US Treasury Bonds on the open market until interest rates hit the target that they've set. https://en.wikipedia.org/wiki/Federal_Open_Market_Committee https://en.wikipedia.org/wiki/Federal_Open_Market_Committee Today's announcement is about using that second mechanism.
  - boppo1 4y ago
paulpauper 4y ago
crazy.. nasdaq up 3.3%. this is why i don't short or sell. lol
- 01100011 4y ago
  The market is mostly untradeable right now. Low volume, lots of chop, possible manipulation by market makers. See how it settles in a few days, especially after we get through some more earnings releases(i.e. AAPL).
paulpauper 4y ago
even worse, you have to keep your $ in the saving account for the whole year to capture the .75%. It's possible the fed may lower rates again 6 months form now if sudden recession risk.
LetsGetTechnicl 4y ago
What is being to address the price gouging by companies? Oil and gas companies are seeing record profits, how can it be just inflation that costs are going up?
- Victerius 4y ago
  The free market normally takes care of price gouging by drawing in new entrants. If the barriers to entry are too high, then price controls or nationalization.
  - notch656a 4y ago
    >If the barriers to entry are too high, then price controls or nationalization. Or remove the barriers, like regulation/licensing/taxation.
    - nHD93pTC78g6wvE 4y ago
      The barrier is capital expenditure, not regulation/licensing/taxation. Besides, any competitor entering the market would be expected to make just as much or more profit as the existing companies. Which means they would price their product just the same as the existing companies.
      - notch656a 4y ago
        >The barrier is capital expenditure, not regulation/licensing/taxation. I don't think you can just decide by fiat that things like regulation and licensing aren't barriers. Taxi medallions before Uber comes to mind. >Besides, any competitor entering the market would be expected to make just as much or more profit as the existing companies You also cannot just decide by fiat that adding more competitors mean the same amount or more profit. I don't think it is a very popular economic opinion to believe that adding more competition raises the profit. I do not understand why any rational competitor would expect their profit would be higher with more competition, unless they have some kind of edge.
- 4y ago
orzig 4y ago
Did S&P 500 jump on the news?
- paulpauper 4y ago
  even more ...was 2% and now 3.5% .
- newaccount2021 4y ago
- clintonwoo 4y ago
  You could say the market was pricing in expectations of worse interest rates (1%)
balozi 4y ago
Considering The Fed's abysmal track record, I fear the only outcome of this is more boom and bust cycles. Maybe we would be better off without Fed and Treasury intervention.
- colinmhayes 4y ago
  The fed and it’s macroeconomic policy is one of the biggest reasons for economic growth in the post world war 2 era. Obviously they’re not perfect, but they’re the main reason we don’t have 40 year recessions anymore like we did in the 19th century.
  - boppo1 4y ago
    Can you support this? Could it be that their policy was bad but even bad policy couldn't stop the US, which spent WW2 turning into a manufacturing powerhouse while all its competition was getting leveled from the sky? Maybe the production of useful goods and services lead to wealth, not policies formed by comittee.
  - al_mandi 4y ago
    Didn't they deal with interest during those periods that caused the long recessions you're talking about? I think we're seeing a pattern here.
benjaminwootton 4y ago
I wonder if people are starting to question if the magnitude of the Covid response was justified now the bill is becoming due? Is anyone willing to put their head above the parapet of supporting the shutdowns and now realising it wasn’t worth the cost? Huge inflation, generational debts, increased poverty, broken systems left right and centre etc etc. Or does Putin get all the credit?
- paulpauper 4y ago
  real economic growth since 2020 is still positive despite inflation and covid
- RIMR 4y ago
  I think that if we have to choose between letting hundreds of thousands of additional people die, or having a healthy economy, we utterly failed our priorities as a society long before the pandemic started.
  - 650 4y ago
    "Every one percent unemployment goes up, 40,000 people die" – this comes from the film The Big Short.
    - aschearer 4y ago
      Not sure if you're being serious with these numbers, but we've had 1,000,000 covid deaths in the U.S. So we'd need 25% unemployment to match... And people are still dying from covid.
    - pessimizer 4y ago
      Unemployment is historically low.
  - JoshuaDavid 4y ago
    If a society makes the choice that they'd rather be a bit wealthier, at the cost of having slightly lower life expectancy, that certainly does say something about the society in question. I don't think I would describe a society that knowingly and intentionally made that decision as having "utterly failed", though. US society has failed the "knowingly and intentionally" side of that, and also mostly the "trade" side of that (vaccines being the exception -- we actually did succeed at trading a pretty small amount of money for much-better-than-baseline outcomes there). But the problem wasn't that we chose to trade life for money, the problem was that we failed to have and act upon coherent priorities at all.
ClumsyPilot 4y ago
Maybe inflation is not the boggieman it is made up to be. We had much higher inflation in 80's, sometimes in double digits, and salaries outpaced inflation. By contrast in 2010s inflation was nearly zero and oay has declined. There is no rule in economics that says inflation should be at near-zero like it was for the past couple decades. Additionally, you would think that the ti.e period when we had near 0% inflation would be the time to invest in long-lofe assets like solar panels and wind turbines, that take lond time to pay back. But we didn't really take advantage. Now we can see all stocks are down as speculating with borrowed money becomes more expensive. Meanwhile those of us without access to leverage can't afford to buy assets - it is entirely possible that inflation will benefit the common man. https://www.tuc.org.uk/news/pay-rises-have-got-weaker-every-decade-80s https://www.tuc.org.uk/news/pay-rises-have-got-weaker-every-...
clintonwoo 4y ago
It seems from the statement that the fed understands that the inflation is being caused by supply chains and the war in Russia. What I don't get though is how that's considered monetary inflation as opposed to the money supply increasing. I thought that it was just price increases. So the fed mandate is just to ensure that the prices of goods and services barely ever changes even if it means tanking all the markets?
- boppo1 4y ago
  >inflation is being caused by... the war in Russia The war is in Ukraine and it is not the primary driver of inflation. https://youtu.be/kOZoamzhfD0 https://youtu.be/kOZoamzhfD0
setgree 4y ago
Why does the Fed write the way it does? First, this article buries the lede. The first seven sentences are framing. Only sentences 8-9 are actually news. The next four are, again, context. The headline also does not actually say what happened. Second, of the fourteen sentences here, a full six are trivially true -- "The Committee is highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run." & everything from "The Committee is strongly committed to returning inflation to its 2 percent objective" through "The Committee's assessments will take into account a wide range of information". These are all obvious and don't add any actual information -- or maybe they do and it requires more cultural knowledge than I possess to read between the lines? Third, use of jargon, e.g. "Recent indicators of spending and production have softened". WTH does 'softened' mean? From context, I'm guessing it means "show evidence of decelerating growth." Why not just say that? Fourth, hyperlinks? references? Why not provide links to the economic data that's informing the decision? Molly Young has a great article called "Why do cdorporations speak the way they do?" [0] that provides a compelling account of exactly that. Do we have something similar for the Fed? Or for bureaucracies in general? [0] https://www.vulture.com/2020/02/spread-of-corporate-speak.html https://www.vulture.com/2020/02/spread-of-corporate-speak.ht...
- genericresponse 4y ago
  Because they aren't writing for a general audience. They're writing for an academic, professional finance, and governmental audience. It's extremely relevant that their word choice is being scrutinized for suggestions of what their future policy will be. Similarly, their use of jargon would be well understood by their audience. Context matters in communication. You could consider this almost ritualized. That's something very different than corporate doublespeak that seeks to obscure rather than inform.
- lamontcg 4y ago
  "Tell me you were too young to remember Alan Greenspan without telling me that" The Fed has always shied away from saying things too bluntly, and preferred to deal with wishy washy code words. If it ever says something bluntly you know they really mean it. Something like "softened" is a deliberately ambiguous phrase designed to acknowledge the reality that they're declining without causing panic, by being uncertain and sounding not terribly bad. You're supposed to wonder what that means and argue about it, so the markets don't bolt one way or the other. If you look up the history of Alan Greenspan ("The Maestro") and the way that investors in 2003 watched for the changes in single words from meeting to meeting from the Fed, so that he never startled the emotionally delicate markets you'll see there's a long history of this kind of language. Also it kind of scares the crap out of me that they're bumping rates by 75 basis points every meeting. If you understand how much Greenspan was walking on eggshells back in 2003, they're fucking screaming right now by their actions that they're going to plunge the economy into a recession in order to get wage growth and unionization under control.
al_mandi 4y ago
I think they're doing this so that come the elections in a couple of years, they'll drop the rates to the economy goes up.
eftychis 4y ago
To other commenters: The only thing and the only job the Fed has now is to increase the Consumer Sentiment Index (without destroying royally the economy and the Consumer Confidence Index (employment that is)). Its power are the statements and showcasing it is doing stuff. That's it. The interest rates and treasury issuance will do nothing by themselves -- the banks have not unloaded their portfolios yet. If it wanted to affect things it would start messing with the Mortgage Backed Securities "portfolio" which would be the "nuclear fusion bomb" word. So let's hope people get convinced that things are fine and don't start running to the banks/stores to stock up on ... toilet paper. (wink) Edit: https://ycharts.com/indicators/us_consumer_sentiment_index https://ycharts.com/indicators/us_consumer_sentiment_index (Consumer Sentiment Index)
tmsh 4y ago
I think this is a good take: https://www.youtube.com/watch?v=MBo4GViDxzc https://www.youtube.com/watch?v=MBo4GViDxzc (and that John Oliver has gotten better and better at distilling the why of current events)
RickJWagner 4y ago
I wish they'd gone with a full point. Inflation really, really sucks.

167 points by scrlk 4y ago

what does this mean/imply: > In addition, the Committee will continue reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities

88913527 4y ago
In short, it means this line will go down: https://fred.stlouisfed.org/series/WALCL https://fred.stlouisfed.org/series/WALCL You can see it went up substantially in 2020 and 2021.
- WebbWeaver 4y ago
  And 2008 (without going back down). The component from 2008 AFAIK is mostly the mortgage backed securities. I don't endorse everything this guy is saying but it is an interesting article https://www.axios.com/2022/05/18/fed-mortgage-portfolio https://www.axios.com/2022/05/18/fed-mortgage-portfolio
datalopers 4y ago
The fed has been keeping the prices of these artificially inflated through QE. They've stopped buying (they aren't selling yet, but simply letting securities mature) and the massive reduce in demand leads to a decline in prices of the corresponding assets.
- dragonwriter 4y ago
  > The fed has been keeping the prices of these artificially inflated through QE No, as the word “continue” implies, it has been, and plans to go on with, keeping the prices artificially low via Quantitative Tightening. QE ended a while back.
  - datalopers 4y ago
    QE4 ended in March '22. I'm not sure the particular nuances of the timeline matter to the person asking the question.
kloch 4y ago
Currently, it means they will continue to let some small part of the securities the Fed hold on their balance sheet mature without immediately re-investing the proceeds. Outright sales of these securities are another option that they seem reluctant to do at this point. Either way this has the effect of reducing the amount of money in the system (the opposite of QE where they created money out of thin air to buy the securities in the first place).
deleted 4y ago
[deleted]
cpitman 4y ago
During the pandemic (and also during the response to 2008 recession) the Fed has been injecting cash into the market by buying Treasury securities and mortgage-backed securities. This is what "Quantitative Easing" is, and is a relatively new tool used by the Fed that they started leaning on when interest rates really could not go much lower. (https://en.wikipedia.org/wiki/Quantitative_easing https://en.wikipedia.org/wiki/Quantitative_easing) Now the Fed has a really large backlog of these securities, and they are starting to unwind that by selling those securities off, effectively removing cash from the economy and slowing down economic activity (and therefore hopefully inflation).
chomp 4y ago
https://www.federalreserve.gov/newsevents/pressreleases/monetary20220126c.htm https://www.federalreserve.gov/newsevents/pressreleases/mone... https://www.federalreserve.gov/newsevents/pressreleases/monetary20220504b.htm https://www.federalreserve.gov/newsevents/pressreleases/mone... The Federal Reserve has been working for the past few months agreeing on a plan to reduce the balance sheet. They are just saying that they are still continuing this work.
HillRat 4y ago
This is what's called "open market operations," and it's basically the first echelon of attack on inflation. If the Fed sells government (and government agency) securities, then banks buy them, returning money to the Treasury and reducing the banks' lending liquidity. By reducing the money supply, the Fed can put a brake on inflation. The overall implication is that the Fed either wants a sharp anti-inflationary shock, or believes that longer-run secular inflation is in the cards, and is willing to cool the economy to manage that risk.
- wincy 4y ago
  Do the banks have to buy them? Why do they buy them? Wouldn’t the bank have an advantage if it had liquidity when nobody else does?
  - redblacktree 4y ago
    The banks buy them for the risk-free return.
    - wincy 4y ago
      That makes sense. If the US government defaults on their debt the bank has more important things to worry about.
csense 4y ago
The linked Implementation Note says $60B / month of Treasury and $17.5B / month of MBS, with the latter doubling to $35B / month in September. The Implementation Note says it only applies as principal is paid, so this is an upper bound. According to the maturity distribution at https://www.federalreserve.gov/releases/h41/ https://www.federalreserve.gov/releases/h41/ the Fed has effectively all of its MBS with maturity > 1 year, with the vast majority over 10 years. AFAIK we don't have any other maturity information that "over 10 years", but I might assume it's 20 years on average because it's uniformly distributed between 10-30 years (AFAIK 30 years is typically the max mortgage time in the US). Dividing $2.7 trillion by 240 months gives $11.25 billion per month. Which implies an increase of the cap from $17.5B to $35B is a no-op, as rollover would already be maxed a little over $11B. So why bother? Any bond / Fed experts able to shine a light on what's wrong with my numbers?

satao 4y ago

damn, inflation in my country will be crazy after this. our gas prices are already really high (the government had to subsidize it until the end of the year to have a chance of being reelected). now probably this crazy politic will be nullified since the dollar will get more expensive

alexb_ 4y ago
Dollars becoming more expensive is the exact opposite of inflation. ok I get it they don't live in the US don't need 8 people all posting at the same time to tell me this
- lampshades 4y ago
  Not for other countries that have to print more of their own currency to try and afford more dollars.
  - notch656a 4y ago
    How would printing more foreign currency make their total dollar-measured goods/services/estate that people actually want to trade dollars for any different in terms of dollars?
- kube-system 4y ago
  Yeah, if you get paid in dollars. I assume by the phrasing of the comment that is not the case.
- pkulak 4y ago
  No, that's what happens when your currency inflates. It's all relative.
- selectodude 4y ago
  Not when it becomes far more expensive in your home currency to buy dollars.
- jsnell 4y ago

zamalek 4y ago

Very good. This is going to hurt quite a bit, but is going to prevent real pain in the long run. Much like something we should have all done a year ago.

nimbius 4y ago
I think you're right, but I'm a little pessimistic after covid relief and the 08 crash. we have 9.1℅ inflation and the damage control from the reigning party trying to explain away an obvious recession makes quarter point increases seem like performance art. student loans are already such an untenable debt bubble that the same potus that stumped for their perpetuity is now forgiving them. auto loans are an equally prime disaster waiting to happen as their average term is now 72 months and the average monthly payment is $700
- heartbreak 4y ago
  The President is hardly forgiving student loans. So far the government has only forgiven loans of students who went to scam schools.
  - deleted 4y ago
    [deleted]
icedchai 4y ago
We need to realize rates are still quite low. To put it in perspective, we're finally back to 2019 levels. There's still a long way to go to get back to 2005 (5%-ish rates).
paulpauper 4y ago
A year ago the economy was still in the grip of covid. no one expected things to recover so fast from such a huge crisis like covid. Thing went from "the world is coming to an end" to new highs just 7 months later. that's nuts.

pdonis 4y ago

Is 75 basis points correct? The actual press release appears to describe an increase from 2-1/4 percent to 2-1/2 percent, which is only 25 basis points. It says it "anticipates that ongoing changes in the target range will be appropriate", but that's not the same as making additional changes now.

datalopers 4y ago
https://www.newyorkfed.org/markets/reference-rates/effr https://www.newyorkfed.org/markets/reference-rates/effr It was 1.50 - 1.75 before.
- pdonis 4y ago
  Ah, I see, the release says to 2-1/4 to 2-1/2 percent.
alexb_ 4y ago
Interest rates are not a single set percent, they are in a range IIRC. So it's going from 1.5-1.75 to 2.25-2.5, a 75 basis point increase.
deleted 4y ago
[deleted]

01100011 4y ago

Funny that this would rocket to the front page so quickly. Shows where everyone's minds are at. A lot of folks were banking on a pivot by the fed but they failed to understand how seriously the fed now sees inflation. Sure, the fed could/should have raised even higher, but consider they need to orchestrate a less disruptive start to our next recession. They're still doing QT as well, which will also help tame inflation.

88913527 4y ago
The Fed does a very good job at setting market expectations. If it sees the market is mis-aligned with its thinking, it will use soft policy tools like interviews and public statements (outside of more formal options, like regularly scheduled official FOMC press releases) to bring the market to its expectations. Markets priced a greater than 3-in-4 chance of a 75 basis point increase, which was the decision: https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html https://www.cmegroup.com/trading/interest-rates/countdown-to... In the preceding weeks, especially after the latest inflation report came out, markets began pricing a ~90% chance of a 100 basis point increase. Then came out the interviews to steer markets back to 75.
aresant 4y ago
The stock market is usually the best indicator of investor sentiment - the consensus was a 75 bps increase, that's what the market got, and as a result the market sustained gains from today. https://finance.yahoo.com/news/stock-market-news-live-updates-july-27-2022-113235652.html https://finance.yahoo.com/news/stock-market-news-live-update...
- 01100011 4y ago
  We'll see where the market settles in a few days. I wouldn't read too much into today's price action. You're seeing a lot of options action in a low volume market. We're not even done with a big earnings week(cough, AAPL, cough).
bhahn 4y ago
> Funny that this would rocket to the front page so quickly. Shows where everyone's minds are at. I don't find this so surprising. Inflation (and rates as a consequence) has been affecting a good number of people directly or indirectly (cost of goods/gas, stocks, layoffs, etc).

nodesocket 4y ago

Now if we can only get states (like California) to stop giving out stimulus payments (they literally calling it inflation stimulus; learn economics 101) and drop student debt forgiveness nonsense. The fed is trying to curb inflation, while politicians are trying to get re-elected at any cost, fighting the fed.

lampshades 4y ago
California doesn’t have a central bank, so it’s not like it can print money out of thin air like the Federal Reserve. If they’re giving out stimulus, they must be getting it from tax payers, right?
- kube-system 4y ago
  Technically speaking, not all state government revenue is tax revenue; states can issue bonds or other debt
  - count 4y ago
    Which is repaid via?
    - kube-system 4y ago
      Issuing more debt? :)
  - lampshades 4y ago
    But someone has to buy the bonds if they want to give out the stimulus as dollars. What are they doing in California? I haven’t been paying attention.
    - milkshakes 4y ago
      they have a budget surplus

fenek 4y ago

I don't get it. The price of gas I'm paying in the US, has dropped by 20% in the last month or so. That seems to indicate that prices are going back to normal. What prices is fed concerned about?

boringg 4y ago
Gas isn't the only thing that is responsible for inflation it's only part of the equation.
erellsworth 4y ago
The price of labor. Their goal is to suppress wages. Gotta put workers back in their place or the whole system collapses.
- just_steve_h 4y ago
  Which is also why there's bipartisan consensus on giving lots more money to police and the military. After all, someone has to control the violent rabble as they are priced out of decent living!
  - vorpalhex 4y ago
    The wealthy can afford private security. Crime mostly hurts less fortunate people and has had a significant jump: https://abcnews.go.com/US/12-major-us-cities-top-annual-homicide-records/story?id=81466453 https://abcnews.go.com/US/12-major-us-cities-top-annual-homi... In terms of military spending, you may have heard of an illegal invasion and war happening in Eastern Europe...
- JumpCrisscross 4y ago
  Broadly speaking, if complaints oscillate between the central bank punishing savers one year and workers the other, that bank is doing something right.
- vorpalhex 4y ago
  Inflation hurts labor, not the wealthy. Bill Gates doesn't care if his groceries are 10% more expensive. Inflation is outpacing wage increases so effective wages are actually lower in terms of buying power. Housing is getting more expensive at a faster rate than wages are increasing. If you are pro-labor you want the fed to aggressively raise rates because that makes life harder for business.

UncleOxidant 4y ago

Still a very low rate by historic standards. We've got a ways to go.

tdhz77 4y ago
It was about 6.5% in the 1998 recession and 5.25% in the 2007 great recession. It's unlikely we will head into a recession anytime soon. Numbers are all over the place, but I see most of it as temporary (Covid, Gas Prices) and not structural or risky behavior from investment banks in 2007. Remind me if I'm wrong, but I think inflation will drastically drop next report.
- peterlk 4y ago
  > not structural or risky behavior from investment banks in 2007 I don't see it that way at all. Over the last couple years, we've seen an explosion in private capital investments, NFT and crypto fads (questionable, but I would argue that these were large enough to be considered structural), greatly increasing home prices, supply chain disruptions, the war in ukraine (and all its knock-on effects). Things are a bit topsy-turvy, and I am hesitant to write off all of these things as "not structural".
  - tdhz77 4y ago
    The values of homes went up during the pandemic because people were in their homes. The extra savings of not going out to eat, vacations, etc.. enabled people to reason that paying for more of a house to fit their work from home lifestyles worth it. When you add that plus the historically low interest rate it was a tour-de-force. You might be on to something that it might be more structural now than how I originally thought. People are locked in homes that might be another housing crises, and if we start having job loss we could see something ugly like 2007. Again, I remain hopeful that salaries are up and unemployment is low. On the positive side, the US is better off inflation-wise in the United States than in Europe.
  - Enginerrrd 4y ago
    The only structural issue I'm concerned about is years of cheap debt. As a result we've seen a lot of growth in debt across individuals, corporations, and governments, and I wonder what happens when we reach a point where debt simply stops growing significantly.

mywittyname 4y ago

I'm skeptical that interest rate hikes will curb inflation. I'm even skeptical that a recession will curb inflation. We have significant shortages of so many products and services that people rely on and the only way I see the situation improving is if supplies increase, maybe dramatically. It's too difficult to curb demand for things like food and housing if the population is growing. Those are things we just need to make more of. And I don't think raising interest rates is going to spur housing starts or investment in production capabilities.

seibelj 4y ago
It's almost like you are encouraging supply side economics... aka... trickle down We need to massively cut corporate taxes, investment taxes, regulations, and all manner of things to increase supply. The government has been attacking business for so long we are in quite the hole.
- waythenewsgoes 4y ago
  This doesn't work, when we tried this most recently all it did was increase stock buybacks by large corps. It's just effectively a wealth transfer to those already at the top of the food chain.
  - bronco21016 4y ago
    This exactly. Look at airlines. They lit tens of billions on fire in stock buy backs rather than pouring it into their businesses from 2015-2020. Who got the first corporate handouts when COVID decimated travel? Individual actors will act in their best interest according to the incentive structure in place.
    - landemva 4y ago
      USA handouts of money to airlines and foreign cruise ship operators was disgusting. Americans are soft and didn't do anything about it.
- 4y ago

colinsane 4y ago

anyone know of bullet-proof analyses into central banking policy out there? after dealing with crypto projects that offer high interest rates, and do so by just inflating their token supply, fed policy seems magical to me. the fed’s offering you yield on your dollars, and that yield comes from printing new dollars (right? there’s no tax increase as part of this announcement). your share of dollars stays constant. so why is it that paying nominal interest on dollars makes people want to buy and hold onto them? how is it that inflating the supply via this one particular method strengthens the dollar? how do you model these things?

seibelj 4y ago
All fiat currencies are backed by the USD. All commodities that matter are priced in USD. Countries must acquire USD to buy oil. Therefore we increase interest rates, makes USD-denominated debt harder to manage, increases demand for dollars, weakens other fiat currencies, dollar is strengthened. What USA business can do now is swoop in and buy all foreign capital assets at pennies on the dollar. Go to Sri Lanka and buy whatever factories and industrial capacity they have. Emerging market crashes are great for the USD money printing country.
- boppo1 4y ago
  >Countries must acquire USD to buy oil Not anymore!
bjt 4y ago
The Federal Reserve doesn't print money. The Treasury does that. The Fed does two things: 1. They lend money to banks through what's called their "discount window". https://en.wikipedia.org/wiki/Discount_window https://en.wikipedia.org/wiki/Discount_window 2. They buy and sell US Treasury Bonds on the open market until interest rates hit the target that they've set. https://en.wikipedia.org/wiki/Federal_Open_Market_Committee https://en.wikipedia.org/wiki/Federal_Open_Market_Committee Today's announcement is about using that second mechanism.
- boppo1 4y ago

paulpauper 4y ago

crazy.. nasdaq up 3.3%. this is why i don't short or sell. lol

01100011 4y ago
The market is mostly untradeable right now. Low volume, lots of chop, possible manipulation by market makers. See how it settles in a few days, especially after we get through some more earnings releases(i.e. AAPL).

paulpauper 4y ago

even worse, you have to keep your $ in the saving account for the whole year to capture the .75%. It's possible the fed may lower rates again 6 months form now if sudden recession risk.

LetsGetTechnicl 4y ago

What is being to address the price gouging by companies? Oil and gas companies are seeing record profits, how can it be just inflation that costs are going up?

Victerius 4y ago
The free market normally takes care of price gouging by drawing in new entrants. If the barriers to entry are too high, then price controls or nationalization.
- notch656a 4y ago
  >If the barriers to entry are too high, then price controls or nationalization. Or remove the barriers, like regulation/licensing/taxation.
  - nHD93pTC78g6wvE 4y ago
    The barrier is capital expenditure, not regulation/licensing/taxation. Besides, any competitor entering the market would be expected to make just as much or more profit as the existing companies. Which means they would price their product just the same as the existing companies.
    - notch656a 4y ago
      >The barrier is capital expenditure, not regulation/licensing/taxation. I don't think you can just decide by fiat that things like regulation and licensing aren't barriers. Taxi medallions before Uber comes to mind. >Besides, any competitor entering the market would be expected to make just as much or more profit as the existing companies You also cannot just decide by fiat that adding more competitors mean the same amount or more profit. I don't think it is a very popular economic opinion to believe that adding more competition raises the profit. I do not understand why any rational competitor would expect their profit would be higher with more competition, unless they have some kind of edge.
4y ago

orzig 4y ago

Did S&P 500 jump on the news?

paulpauper 4y ago
even more ...was 2% and now 3.5% .
newaccount2021 4y ago
clintonwoo 4y ago
You could say the market was pricing in expectations of worse interest rates (1%)

balozi 4y ago

Considering The Fed's abysmal track record, I fear the only outcome of this is more boom and bust cycles. Maybe we would be better off without Fed and Treasury intervention.

colinmhayes 4y ago
The fed and it’s macroeconomic policy is one of the biggest reasons for economic growth in the post world war 2 era. Obviously they’re not perfect, but they’re the main reason we don’t have 40 year recessions anymore like we did in the 19th century.
- boppo1 4y ago
  Can you support this? Could it be that their policy was bad but even bad policy couldn't stop the US, which spent WW2 turning into a manufacturing powerhouse while all its competition was getting leveled from the sky? Maybe the production of useful goods and services lead to wealth, not policies formed by comittee.
- al_mandi 4y ago
  Didn't they deal with interest during those periods that caused the long recessions you're talking about? I think we're seeing a pattern here.

benjaminwootton 4y ago

I wonder if people are starting to question if the magnitude of the Covid response was justified now the bill is becoming due? Is anyone willing to put their head above the parapet of supporting the shutdowns and now realising it wasn’t worth the cost? Huge inflation, generational debts, increased poverty, broken systems left right and centre etc etc. Or does Putin get all the credit?

paulpauper 4y ago
real economic growth since 2020 is still positive despite inflation and covid
RIMR 4y ago
I think that if we have to choose between letting hundreds of thousands of additional people die, or having a healthy economy, we utterly failed our priorities as a society long before the pandemic started.
- 650 4y ago
  "Every one percent unemployment goes up, 40,000 people die" – this comes from the film The Big Short.
  - aschearer 4y ago
    Not sure if you're being serious with these numbers, but we've had 1,000,000 covid deaths in the U.S. So we'd need 25% unemployment to match... And people are still dying from covid.
  - pessimizer 4y ago
    Unemployment is historically low.
- JoshuaDavid 4y ago
  If a society makes the choice that they'd rather be a bit wealthier, at the cost of having slightly lower life expectancy, that certainly does say something about the society in question. I don't think I would describe a society that knowingly and intentionally made that decision as having "utterly failed", though. US society has failed the "knowingly and intentionally" side of that, and also mostly the "trade" side of that (vaccines being the exception -- we actually did succeed at trading a pretty small amount of money for much-better-than-baseline outcomes there). But the problem wasn't that we chose to trade life for money, the problem was that we failed to have and act upon coherent priorities at all.

ClumsyPilot 4y ago

Maybe inflation is not the boggieman it is made up to be. We had much higher inflation in 80's, sometimes in double digits, and salaries outpaced inflation. By contrast in 2010s inflation was nearly zero and oay has declined. There is no rule in economics that says inflation should be at near-zero like it was for the past couple decades. Additionally, you would think that the ti.e period when we had near 0% inflation would be the time to invest in long-lofe assets like solar panels and wind turbines, that take lond time to pay back. But we didn't really take advantage. Now we can see all stocks are down as speculating with borrowed money becomes more expensive. Meanwhile those of us without access to leverage can't afford to buy assets - it is entirely possible that inflation will benefit the common man. https://www.tuc.org.uk/news/pay-rises-have-got-weaker-every-decade-80s https://www.tuc.org.uk/news/pay-rises-have-got-weaker-every-...

clintonwoo 4y ago

It seems from the statement that the fed understands that the inflation is being caused by supply chains and the war in Russia. What I don't get though is how that's considered monetary inflation as opposed to the money supply increasing. I thought that it was just price increases. So the fed mandate is just to ensure that the prices of goods and services barely ever changes even if it means tanking all the markets?

boppo1 4y ago
>inflation is being caused by... the war in Russia The war is in Ukraine and it is not the primary driver of inflation. https://youtu.be/kOZoamzhfD0 https://youtu.be/kOZoamzhfD0

setgree 4y ago

Why does the Fed write the way it does? First, this article buries the lede. The first seven sentences are framing. Only sentences 8-9 are actually news. The next four are, again, context. The headline also does not actually say what happened. Second, of the fourteen sentences here, a full six are trivially true -- "The Committee is highly attentive to inflation risks. The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run." & everything from "The Committee is strongly committed to returning inflation to its 2 percent objective" through "The Committee's assessments will take into account a wide range of information". These are all obvious and don't add any actual information -- or maybe they do and it requires more cultural knowledge than I possess to read between the lines? Third, use of jargon, e.g. "Recent indicators of spending and production have softened". WTH does 'softened' mean? From context, I'm guessing it means "show evidence of decelerating growth." Why not just say that? Fourth, hyperlinks? references? Why not provide links to the economic data that's informing the decision? Molly Young has a great article called "Why do cdorporations speak the way they do?" [0] that provides a compelling account of exactly that. Do we have something similar for the Fed? Or for bureaucracies in general? [0] https://www.vulture.com/2020/02/spread-of-corporate-speak.html https://www.vulture.com/2020/02/spread-of-corporate-speak.ht...

genericresponse 4y ago
Because they aren't writing for a general audience. They're writing for an academic, professional finance, and governmental audience. It's extremely relevant that their word choice is being scrutinized for suggestions of what their future policy will be. Similarly, their use of jargon would be well understood by their audience. Context matters in communication. You could consider this almost ritualized. That's something very different than corporate doublespeak that seeks to obscure rather than inform.
lamontcg 4y ago
"Tell me you were too young to remember Alan Greenspan without telling me that" The Fed has always shied away from saying things too bluntly, and preferred to deal with wishy washy code words. If it ever says something bluntly you know they really mean it. Something like "softened" is a deliberately ambiguous phrase designed to acknowledge the reality that they're declining without causing panic, by being uncertain and sounding not terribly bad. You're supposed to wonder what that means and argue about it, so the markets don't bolt one way or the other. If you look up the history of Alan Greenspan ("The Maestro") and the way that investors in 2003 watched for the changes in single words from meeting to meeting from the Fed, so that he never startled the emotionally delicate markets you'll see there's a long history of this kind of language. Also it kind of scares the crap out of me that they're bumping rates by 75 basis points every meeting. If you understand how much Greenspan was walking on eggshells back in 2003, they're fucking screaming right now by their actions that they're going to plunge the economy into a recession in order to get wage growth and unionization under control.

al_mandi 4y ago

I think they're doing this so that come the elections in a couple of years, they'll drop the rates to the economy goes up.

eftychis 4y ago

To other commenters: The only thing and the only job the Fed has now is to increase the Consumer Sentiment Index (without destroying royally the economy and the Consumer Confidence Index (employment that is)). Its power are the statements and showcasing it is doing stuff. That's it. The interest rates and treasury issuance will do nothing by themselves -- the banks have not unloaded their portfolios yet. If it wanted to affect things it would start messing with the Mortgage Backed Securities "portfolio" which would be the "nuclear fusion bomb" word. So let's hope people get convinced that things are fine and don't start running to the banks/stores to stock up on ... toilet paper. (wink) Edit: https://ycharts.com/indicators/us_consumer_sentiment_index https://ycharts.com/indicators/us_consumer_sentiment_index (Consumer Sentiment Index)

tmsh 4y ago

I think this is a good take: https://www.youtube.com/watch?v=MBo4GViDxzc https://www.youtube.com/watch?v=MBo4GViDxzc (and that John Oliver has gotten better and better at distilling the why of current events)

RickJWagner 4y ago

I wish they'd gone with a full point. Inflation really, really sucks.