4 ms·

Doesn’t a Fed typically lower rates during a recession? At least at some point, in order to bring a country out of the recession.

bandyaboot 4y ago
Though not unprecedented, they're typically not fighting inflation and a recession at the same time.
jacobmarble 4y ago
In this case, the Fed is stimulating a (hopefully mild) recession, by raising interest rates, in order to bring inflation down.
- njarboe 4y ago
  Until rates are above inflation (now around 8%) I would say the Fed is still pumping up the economy, but it's hard to see the Fed push up rates to that level like Volker did the last time the US had high inflation. The Fed set the federal funds rate at 20% in June of 1981 when inflation was about 15%. If the US has to finance much of its debt at 15% something will seriously break.
  - VictorPath 4y ago
    In 1974, President Ford had Whip Inflation Now buttons printed up, and 1981 was seven years later. So Volcker's dramatic raise was in that context. Whereas people are more used to a more moribund economy since 2008 with very low interest rates, inflation, and lots of QE, with the subprime bailout followed by the Covid stimulus. Actual non-negligible inflation and an actual interest rate is something people have started seeing more recently.
  - dageshi 4y ago
    From what I recall there was a fairly long period pre Volker where there were very half hearted attempts to get inflation under control without going for the kill so to speak. I think the Fed knowing that history will try to kill it dead first time, because if they don't they know they'll likely have to go even higher with interest rates at the second attempt and the higher they're forced to go the more danger there will be to US financing operations as you say.
lumost 4y ago
There have been predictions that the Fed would exhaust its capability to regulate the economy through monetary stimulus for years with the end result being inflation and recession. Anecdotally, over the course of my life the size of fiscal and monetary stimulus has only increased. During the 90s we would stimulate with a few points of interest reduction, then in the 2000s we had 08 leading into permanent QE through the 10's. The 2020's have seen stimulus activities far in excess of '08.
tootie 4y ago
The Fed lowers rates when lowering rates could plausibly help. The Fed has a dual mandate to control inflation and maximize employment. Employment remains incredibly strong while inflation is obviously too high which is the clearest possible signal to tighten. The Fed won't/can't react to changes in the stock market, supply chain or foreign policy. It's not just "loosen during recession, tighten during expansion".
- hedora 4y ago
  Also, as the Biden administration is quick to point out, US industrial output is up. So, people are accepting fewer, apparently better employment offers, manufacturing is being onshored, but (due to lower supply of foreign slave labor and exploitable US workers) profits are down, and inflation is up. Since unemplyoment is low, the Fed mandate seems pretty clear at this point. Interest rates should go up. The market will tank for a few years because inflation and paying workers screws with profits, then bounce back (in real terms) once corporate debt, etc unwinds, and productivity starts to rise again. Rigid and weak corporations will be displaced by startups and existing companies that are able to adapt/innovate. It's weird to me that Fox News's staunchly anti-China, pro-US manufacturing Fox News's viewership is so bent out of shape. Aren't we experiencing exactly the effect Trump's tariffs were supposed to achieve?
  - tootie 4y ago
    Not to delve into politics, but I defy to you explain what the Trump administration actually intended the output of the tariffs on China to be. Trump very consistently said the tariffs were retaliatory for China "taking our money" with the trade deficit being his evidence. He sent separate negotiating teams in the form of Steven Mnuchin and Peter Navarro who were pushing two separate agendas neither of which aligned with Trump's nonsensical reasoning. As far as I can tell, the tariffs were pure PR as Trump did not care about or even understand the intricacy of that or any other policies he advocated. And FOX, of course, isn't really conservative news, it's Republican news. In reality, there is a case for tariffs on China that has nothing to do with trade deficits. Biden can't just end them because it will make him look soft and let them off the hook for IP theft and other abuses. Really the president should not have this authority at all, Congress should be doing it.
NovemberWhiskey 4y ago
The Fed has no mandate to generate or maintain economic growth. The two areas in which it does have a mandate are price stability and sustainable employment. Usually, recessions are accompanied by a loss of jobs, so that's where the Fed would intervene; that isn't happening thus far which is another reason why economists are split over what is really going on in the economy.
- ac29 4y ago
  Employment has fallen slightly recently: https://fred.stlouisfed.org/series/CE16OV https://fred.stlouisfed.org/series/CE16OV Not dramatically though, a more charitable view would say that employement levels are fairly flat.
  - hn_throwaway_99 4y ago
    The unemployment rate is also extremely low by historical standards, even when taking into account the various measures of unemployment. There is also plenty of evidence that businesses are finding it unusually difficult to hire employees. The Fed is probably fine with the unemployment rate rising pretty significantly because they probably don't see the current rate as being sustainable.
- OscarCunningham 4y ago
  > The Fed has no mandate to generate or maintain economic growth. Correct. And yet they let inflation get this bad, so it seems like they're trying to avoid recessions even though they haven't been told to.
  - kube-system 4y ago
    Or they believed it would be transitory and any action would upset longer term price and employment stability.
    - NovemberWhiskey 4y ago
      You don't need to guess; you can go read the minutes of prior Fed meetings here: https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm https://www.federalreserve.gov/monetarypolicy/fomccalendars....
SkyMarshal 4y ago
The Fed learned under Volcker back in the early 80s that prioritizing killing inflation is the best way to ensure medium and long-term economic and employment growth, even if it causes lower growth or recession in the near-term. That’s likely the playbook Powell is operating under now.
- jjoonathan 4y ago
  Perhaps, but the Fed chair is a political appointment and the politicians learned a different lesson. Carter appointed Volcker and put America on chemotherapy. He caught blame for both inflation and de-leveraging withdrawal symptoms. Reagan got to take America off chemotherapy and take credit in the popular conscience for both reduced inflation and the re-leveraging boom. The political lesson: putting America on chemotherapy is important but politically somewhere between "thankless" and "suicidal." When Powell was confirmed, it was with this context in mind. Politicians were thinking "do I want to be the next Carter"? I am worried that they only confirmed Powell because they thought he would not be the next Volcker. Of course, now that he has been confirmed for the next 4 years, he has some freedom to diverge from expectations. We'll see.
- ptero 4y ago
  In Volker time, federal debt (as a fraction of the GDP) was low, he could raise rates without crippling the budget with interest payments. With today's federal debt level the fed is screwed: it cannot raise rates even close to inflation without busting the budget and cannot lower them (to fight a recession) without spiking inflation. My bet is on long term rates-below-inflation period to deflate debts, similar to post-war period in the 1940s. And lots ofrhetoric. But it will be a painful ride.
  - solveit 4y ago
    The Fed does not have the mandate to do what is convenient for the budget. That's not their problem. Obviously this is naive and I'm sure the Fed is under all kinds of pressure, but the Fed is supposed to kill inflation by raising rates to whatever it takes, as long as they don't kill jobs at the same time. The government is supposed to figure something out themselves.
mc32 4y ago
The extreme options look like Japan on the one hand and Zimbabwe on the other hand. We’re not going to land on either extreme but I think it’s clear which is the preferred option.
- slaw 4y ago
  I would prefer to live in Japan than Zimbabwe. Unfortunately Fed likes the opposite option.
camhart 4y ago
Challenge is when you're facing a recession while also trying to control inflation. See "stagflation" [1]. [1] https://www.investopedia.com/terms/s/stagflation.asp https://www.investopedia.com/terms/s/stagflation.asp
dragonwriter 4y ago
> Doesn’t a Fed typically lower rates during a recession? Recessions have weak employment (that's one of the most important factors NBER looks at to determine recession, among the key reasons they have declared two of the last three recessions without two consecutive down GDP quarters, and one of the key reasons the present two consecutive down GDP quarters is arguably not a recession.) The Fed dual mandate relates to price stability and full employment (it doesn't independently consider recession per se.) It typically lowers rates in a recession to nudge back toward full employment. Employment remaining strong and inflation remaining high, thought, it raises rates, even if some people think it may be a recession.

bandyaboot 4y ago

Though not unprecedented, they're typically not fighting inflation and a recession at the same time.

jacobmarble 4y ago

In this case, the Fed is stimulating a (hopefully mild) recession, by raising interest rates, in order to bring inflation down.

njarboe 4y ago
Until rates are above inflation (now around 8%) I would say the Fed is still pumping up the economy, but it's hard to see the Fed push up rates to that level like Volker did the last time the US had high inflation. The Fed set the federal funds rate at 20% in June of 1981 when inflation was about 15%. If the US has to finance much of its debt at 15% something will seriously break.
- VictorPath 4y ago
  In 1974, President Ford had Whip Inflation Now buttons printed up, and 1981 was seven years later. So Volcker's dramatic raise was in that context. Whereas people are more used to a more moribund economy since 2008 with very low interest rates, inflation, and lots of QE, with the subprime bailout followed by the Covid stimulus. Actual non-negligible inflation and an actual interest rate is something people have started seeing more recently.
- dageshi 4y ago
  From what I recall there was a fairly long period pre Volker where there were very half hearted attempts to get inflation under control without going for the kill so to speak. I think the Fed knowing that history will try to kill it dead first time, because if they don't they know they'll likely have to go even higher with interest rates at the second attempt and the higher they're forced to go the more danger there will be to US financing operations as you say.

lumost 4y ago

There have been predictions that the Fed would exhaust its capability to regulate the economy through monetary stimulus for years with the end result being inflation and recession. Anecdotally, over the course of my life the size of fiscal and monetary stimulus has only increased. During the 90s we would stimulate with a few points of interest reduction, then in the 2000s we had 08 leading into permanent QE through the 10's. The 2020's have seen stimulus activities far in excess of '08.

tootie 4y ago

The Fed lowers rates when lowering rates could plausibly help. The Fed has a dual mandate to control inflation and maximize employment. Employment remains incredibly strong while inflation is obviously too high which is the clearest possible signal to tighten. The Fed won't/can't react to changes in the stock market, supply chain or foreign policy. It's not just "loosen during recession, tighten during expansion".

hedora 4y ago
Also, as the Biden administration is quick to point out, US industrial output is up. So, people are accepting fewer, apparently better employment offers, manufacturing is being onshored, but (due to lower supply of foreign slave labor and exploitable US workers) profits are down, and inflation is up. Since unemplyoment is low, the Fed mandate seems pretty clear at this point. Interest rates should go up. The market will tank for a few years because inflation and paying workers screws with profits, then bounce back (in real terms) once corporate debt, etc unwinds, and productivity starts to rise again. Rigid and weak corporations will be displaced by startups and existing companies that are able to adapt/innovate. It's weird to me that Fox News's staunchly anti-China, pro-US manufacturing Fox News's viewership is so bent out of shape. Aren't we experiencing exactly the effect Trump's tariffs were supposed to achieve?
- tootie 4y ago
  Not to delve into politics, but I defy to you explain what the Trump administration actually intended the output of the tariffs on China to be. Trump very consistently said the tariffs were retaliatory for China "taking our money" with the trade deficit being his evidence. He sent separate negotiating teams in the form of Steven Mnuchin and Peter Navarro who were pushing two separate agendas neither of which aligned with Trump's nonsensical reasoning. As far as I can tell, the tariffs were pure PR as Trump did not care about or even understand the intricacy of that or any other policies he advocated. And FOX, of course, isn't really conservative news, it's Republican news. In reality, there is a case for tariffs on China that has nothing to do with trade deficits. Biden can't just end them because it will make him look soft and let them off the hook for IP theft and other abuses. Really the president should not have this authority at all, Congress should be doing it.

NovemberWhiskey 4y ago

The Fed has no mandate to generate or maintain economic growth. The two areas in which it does have a mandate are price stability and sustainable employment. Usually, recessions are accompanied by a loss of jobs, so that's where the Fed would intervene; that isn't happening thus far which is another reason why economists are split over what is really going on in the economy.

ac29 4y ago
Employment has fallen slightly recently: https://fred.stlouisfed.org/series/CE16OV https://fred.stlouisfed.org/series/CE16OV Not dramatically though, a more charitable view would say that employement levels are fairly flat.
- hn_throwaway_99 4y ago
  The unemployment rate is also extremely low by historical standards, even when taking into account the various measures of unemployment. There is also plenty of evidence that businesses are finding it unusually difficult to hire employees. The Fed is probably fine with the unemployment rate rising pretty significantly because they probably don't see the current rate as being sustainable.
OscarCunningham 4y ago
> The Fed has no mandate to generate or maintain economic growth. Correct. And yet they let inflation get this bad, so it seems like they're trying to avoid recessions even though they haven't been told to.
- kube-system 4y ago
  Or they believed it would be transitory and any action would upset longer term price and employment stability.
  - NovemberWhiskey 4y ago
    You don't need to guess; you can go read the minutes of prior Fed meetings here: https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm https://www.federalreserve.gov/monetarypolicy/fomccalendars....

SkyMarshal 4y ago

The Fed learned under Volcker back in the early 80s that prioritizing killing inflation is the best way to ensure medium and long-term economic and employment growth, even if it causes lower growth or recession in the near-term. That’s likely the playbook Powell is operating under now.

jjoonathan 4y ago
Perhaps, but the Fed chair is a political appointment and the politicians learned a different lesson. Carter appointed Volcker and put America on chemotherapy. He caught blame for both inflation and de-leveraging withdrawal symptoms. Reagan got to take America off chemotherapy and take credit in the popular conscience for both reduced inflation and the re-leveraging boom. The political lesson: putting America on chemotherapy is important but politically somewhere between "thankless" and "suicidal." When Powell was confirmed, it was with this context in mind. Politicians were thinking "do I want to be the next Carter"? I am worried that they only confirmed Powell because they thought he would not be the next Volcker. Of course, now that he has been confirmed for the next 4 years, he has some freedom to diverge from expectations. We'll see.
ptero 4y ago
In Volker time, federal debt (as a fraction of the GDP) was low, he could raise rates without crippling the budget with interest payments. With today's federal debt level the fed is screwed: it cannot raise rates even close to inflation without busting the budget and cannot lower them (to fight a recession) without spiking inflation. My bet is on long term rates-below-inflation period to deflate debts, similar to post-war period in the 1940s. And lots ofrhetoric. But it will be a painful ride.
- solveit 4y ago
  The Fed does not have the mandate to do what is convenient for the budget. That's not their problem. Obviously this is naive and I'm sure the Fed is under all kinds of pressure, but the Fed is supposed to kill inflation by raising rates to whatever it takes, as long as they don't kill jobs at the same time. The government is supposed to figure something out themselves.

mc32 4y ago

The extreme options look like Japan on the one hand and Zimbabwe on the other hand. We’re not going to land on either extreme but I think it’s clear which is the preferred option.

slaw 4y ago
I would prefer to live in Japan than Zimbabwe. Unfortunately Fed likes the opposite option.

camhart 4y ago

Challenge is when you're facing a recession while also trying to control inflation. See "stagflation" [1]. [1] https://www.investopedia.com/terms/s/stagflation.asp https://www.investopedia.com/terms/s/stagflation.asp

dragonwriter 4y ago

> Doesn’t a Fed typically lower rates during a recession? Recessions have weak employment (that's one of the most important factors NBER looks at to determine recession, among the key reasons they have declared two of the last three recessions without two consecutive down GDP quarters, and one of the key reasons the present two consecutive down GDP quarters is arguably not a recession.) The Fed dual mandate relates to price stability and full employment (it doesn't independently consider recession per se.) It typically lowers rates in a recession to nudge back toward full employment. Employment remaining strong and inflation remaining high, thought, it raises rates, even if some people think it may be a recession.