33 ms·

Speech by Chair Powell on monetary policy and price stability

74 points by kamaraju 4y ago

digdugdirk 4y ago
Can someone more fluent in economist-speak please help explain what was said here?
- Afforess 4y ago
  Interest rate hikes will continue until inflation subsidies and interest rates will remain high after that. "Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy"
  - cyberlurker 4y ago
    Right, do not expect rates near 0 in the foreseeable future and as a follow on to that, mortgage rates will go up. So if you are locked in for 30 years with a mortgage purchased the last few years, you did well.
    - paulmd 4y ago
      > So if you are locked in for 30 years with a mortgage purchased the last few years, you did well. Unless prices go down and you end up losing a bunch of money (or worse, underwater). That's the problem, rates and housing prices don't exist in isolation. People don't generally care about the actual sticker price of the house, they care about what the monthly payment is going to be, so lower interest rates imply willingness to bid higher... and the opposite is also true, higher interest rates mean people can't afford to bid as high and sale prices go down. Essentially, people are locked in at higher principal/lower interest, but now the housing market is moving towards lower principal/higher interest, and that means that a huge amount of housing "net worth" (whether current or future) just evaporated for a lot of people. Your $300k house is now a $250k house again and you just lost all that money you spent years paying down (inflation ain't the only way for value to evaporate). If interest rates double, then so does the interest portion of the mortgage for new homebuyers. It's not quite double, since some of the mortgage goes to principal, but it'll be almost double. And with the interest rate so low... it doesn't make much in "real terms" to make a big relative increase. I refi'd at... 2.75%? So if the fed raises interest rates from 0% to 2%, that nearly doubles my interest rate. Obviously I am not buying today but other people are, and that still determines the value of my asset. I suppose it's the old "don't buy the house as an investment, buy it to lock in a rent that you can afford" but it's definitely been worrying me. Thankfully the last few years have put me far enough ahead that I'm not in any danger even with a big dip. And I suppose the counterargument is that institutional buyers are still making big cash offers, so maybe there won't be that much of a dip. But without the hike, values would have gone higher, it's still a loss of expected value. And the institutional investors aspect of the market is really not a great thing either right now.
      - cyberlurker 4y ago
        Yea, we don't know which way anything is going to go so it might end up being better to wait. As of now though, home prices haven't dropped much in many areas due to lack of supply. I think both positions have merit, but for a variety of reasons I think the lower rate home is the better position. And you also don't really “lose” money, but yes the house value on paper could go down from the historic highs.
  - deleted 4y ago
    [deleted]
  - crypto420_69 4y ago
    Not just that. He mentioned the 1970's and 80's five times, which was a period of high inflation, high rates and civil unrest. From https://en.wikipedia.org/wiki/Paul_Volcker#Chairman_of_the_Federal_Reserve https://en.wikipedia.org/wiki/Paul_Volcker#Chairman_of_the_F...: "Volcker's Federal Reserve board elicited the strongest political attacks and most widespread protests in the history of the Federal Reserve (unlike any protests experienced since 1922), due to the effects of high interest rates on the construction, farming, and industrial sectors, culminating in indebted farmers driving their tractors onto C Street NW in Washington, D.C. and blockading the Eccles Building. US monetary policy eased in 1982, helping lead to a resumption of economic growth" TL;DR it's going to get ugly
- BayAreaEscapee 4y ago
  He said, "We're going to jawbone a lot about inflation and make some token steps, but not actually do what will solve the issue. Who do you think I am, Paul Volsker? We're in debt trap and more worried about springing the trap than about persistent and high inflation. Don't worry, young whippersnapper, in the future you'll own nothing and you'll be happy!"
  - zie 4y ago
    If inflation is due to supply, the Fed can't do anything about it. They can only affect the demand side of the equation, which they are doing.
- baobob 4y ago
  The beatings will continue until the yield curve improves
- ddulaney 4y ago
  For me, this is the money quote: > Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. The Fed has some tools, most notably the interest rate, that can probably slow down inflation but at the cost of probably slowing down growth. A big question has been the degree to which the Fed will give up growth in order to try to reduce inflation. This speech makes it sound like the Fed is likely to trade off a lot of growth in order to hit inflation targets. What does that mean for most people? Probably bad things in the short term. > While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. It makes it sound like the Fed is willing to inflict some damage to hit its inflation target. This isn’t a change exactly, but it’s a confirmation about what lots of people have speculated might happen.
  - deleted 4y ago
    [deleted]
  - matwood 4y ago
    Yeah, between the lines it says 'wages are too high, so we need a recession to put the worker back in line'.
    - lotsofpulp 4y ago
      And outside the lines, we have a demographic problem with fewer and fewer young people to juice the economy and provide the labor needed to meet expected return on assets that went into many decisions borrowing wealth from the future.
    - hedora 4y ago
      Ok, but the actual mechanism will be to stop giving free money to the wealthy. This is an attack on the working class in roughly the same way trickle down economics is a subsidy of the working class.
  - 4y ago
- meltyness 4y ago
  I think the key take aways are as follows. Prerequisite is the understanding that the Fed has a mandate to: maximize (productive?) employment, and maintain inflation at 2%. - Employment is very high, as it stands. The intention of easy money was to maintain purchasing power, and prevent household shocks due to government shutdowns during the pandemic. It is being used by companies to game the market, and win as evidenced by this change, producing demand-side inflation. - Productivity is low, as measured presumably by per-capita GDP projections. Indicating continued economic dislocations between prices and corporate activities. Investments are concentrating into unproductive sectors. Capital inflows aren't improving productivity, so the cost of productivity is going up -- supply-side inflation. - Households and businesses are still gobbling up a lot of debt OR a lot of savings, spurred on by USD inflation -- to employ those individuals, to live outside reasonable means -- or preparing "for the worst." This is the manifestation of the K-shaped recovery, where activities are significantly altered, in anticipation of near-term economic changes. Acquisitions probably would highlight this, but the branches of government have talked FAANG out of this but Broadcom-VMWare highlights a counterexample. The narrative that is latched onto by investors pertains to the Fed's intention to hike rates until employment begins to fall, he states that they're planning on "overshooting" the fed-funds rate, so that business investment will fall, and concentrate onto more reliable business-models. Jerome Powell also invoked Paul Volkert, basically to signal that risk assets are no longer a key-metric being observed.
  - jason-phillips 4y ago
    > Investments are concentrating into unproductive sectors. With all the bullshit startups over the past decade or two, I thought this was accepted as the new normal.
    - meltyness 4y ago
      When Google ripped Microsoft a new Chrome, this was supposed to free up some gears, and it did -- because of under-investment in employees at the time, and the malleability of software it was all soft goods. Bottom line, the product improved. When Zillow rips the housing sector an expensive and unfunded demand for renovation -- this is where the "growth" investment thesis starts to break down, a massive acquisition of hard goods, made possible because of risk-asset price inflation. Bottom line, the product is worse for the foreseeable. It's icky, but thankfully these types of radioactive business models are getting identified sooner rather than later.
- kyrra 4y ago
  The fed during the 1970s brought down inflation for a little while, but it spiked again. The hope is that Powell has learned this lesson and will keep interest rates high enough for long enough to stop it from being more persistent. See: https://www.wsj.com/articles/jerome-powell-should-learn-from-arthur-burns-forward-guidance-tight-credit-interest-rate-hikes-1970s-inflation-federal-reserve-volcker-chairman-11661688352 https://www.wsj.com/articles/jerome-powell-should-learn-from... But then you have those that argue that inflation is a bit more transitory and different than the 1970s, as it is more supply chain induced. And if we keep interest rates high for too long, it will hurt the economy, as cheap money isn't the cause of inflation. See: https://www.wsj.com/articles/inflation-isnt-transitory-but-it-isnt-permanent-either-federal-reserve-interest-rates-oil-energy-costs-prices-11654113873 https://www.wsj.com/articles/inflation-isnt-transitory-but-i...
- bedhead 4y ago
  The fed is going to try to put the economy into a recession by jacking up rates in the hopes that it eviscerates demand which will (maybe, but I don't think so) bring inflation down by balancing supply and demand. Fun times.
- gdubs 4y ago
  I asked OpenAI to write it as an "explain like I'm five": [edit: which according to a comment below is a mix of copy paste and a 180 degree misreading, lol. I'd be curious if the synopsis would be better had I pasted his remarks rather than passed a link in, but I'm not at my desk to try rn.] The Federal Reserve is responsible for ensuring that the economy is stable and that inflation is low. In order to do this, they use a number of tools, one of which is interest rates. When the economy is doing well, the Fed will raise interest rates in order to prevent inflation from getting too high. When the economy is not doing well, the Fed will lower interest rates in order to encourage spending and help the economy grow. The Fed has been keeping interest rates low for a while now because the economy has not been doing well. However, as the economy has begun to improve, the Fed has been slowly raising interest rates. In his speech, Powell said that the Fed plans to continue to raise interest rates slowly as the economy continues to improve. However, he also said that the Fed is prepared to lower interest rates again if the economy begins to slow down.
  - hedora 4y ago
    Unsurprisingly, the first part is apparently copy pasted from an intro macroeconomics text and the second half is exactly the opposite of what Powell said.
TekMol 4y ago
Here is my view on inflation: 1: The root of inflation is the printing of money 2: No government will reduce the printing of money. It is just too convenient. It is like taxing more and more without getting much complaints. 3: Governments will rather use tricks to lower inflation. Change the definition. Make laws to restrict prices. Subsidize the production of goods to make them cheaper. Conclusion: The value of money will go down the drain faster and faster forever.
- Sparkle-san 4y ago
  Inflation can exist without the printing of money so I'm not sure it qualifies as the root. Supply and demand seems more likely to be the root, which can be affected by the printing of money and by other things such as supply chain constraints.
  - JackFr 4y ago
    Too much money chasing too few goods. The Fed can only control the too much money side of the equation. In the case of inflation do to a supply side shock to an inelastic good, that is necessities with few or no substitutes, there is nothing the Fed can do.
- epgui 4y ago
  The way I understand it (and this is not my area of expertise), this view could have been cutting-edge 50-100 years ago, but now it’s not really sophisticated enough.
  - everybodyknows 4y ago
    It's not a bad sketch of inflation in countries where central bankers follow orders from the head of state, and the head of state needs to win elections. Such as Argentina, or Turkey.
  - TekMol 4y ago
    Prove me wrong. The numbers I see (asset prices and monetary base both going up and up and nothing but up) are in sync with my view.
aluminussoma 4y ago
For as long as I can remember, there has been a vocal group of doomsayers predicting financial catastrophe. Powell's speech is like catnip to that group.
- scotuswroteus 4y ago
  Were you born in 2009? Because if your memory worked in 2008, you'll recall that massive government bailouts were required to prevent full on collapse: the doom you dismiss as though anyone fearing it is no less in control of their critical faculties than a household pet. That happened less than twenty years ago.
  - AndyNemmity 4y ago
    Massive Government Bailouts may or may not have been required, however they occurred.
  - aluminussoma 4y ago
    I was probably born long before you. And you are twisting my words.
  - newaccount2021 4y ago
  - boppo1 4y ago
    >massive government bailouts were required to prevent full on collapse *allegedly. We have no data on what would have happened if we'd let the banks fail, put their C-suites in jail and used bailout money as a safety net.
newaccount2021 4y ago
runnerup 4y ago
I'd like to find numbers which illuminate how much of the inflation is caused by lack of supply for relatively inelastic commodities. If the way out of shortages is to invest in more production, higher interest rates seems detrimental in the face of that type of inflation. If, on the other hand, inflation is caused by groups/individuals buying lots of silly things because they are flush with tons of cash, then rising interest rates should put a stop to speculative/impulse elastic spending. To me, it seems an important distinction whether "excess" cash is going towards buying elastic goods/services (peloton cycles, fancy grills, RTX3080 for gaming, etc) or simply fighting over shortages of inelastic goods (baby formula, bacteriostatic water, shipping space, gasoline, etc). I suspect that our largest improvement would come from investment in transportation infrastructure for goods -- all of that is super choked right now and it affects everything. Many people are concerned about the rising price of real-estate and I agree, but I'm not sure interest rates are fine-grained enough for this...ideally Congress could address that with Anti-NIMBY legislation and/or taxes on properties which are not lived in by their owners, which could be directly redistributed to anyone who purchases a new home.
- onlyrealcuzzo 4y ago
  > If the way out of shortages is to invest in more production, higher interest rates will be detrimental in the face of that type of inflation. Do you have numbers that show that's what people do when interest rates are low? I don't have numbers - but my suspicion is that they mostly just speculate on asset prices. Where was all the investment in the last 20 years that low interest rates should've brought on? What it did bring on was companies borrowing money to buy-back their shares to return >100% of profits to investors. And don't even get me started on how negative real interest rates are a negative wealth tax.
  - noirbot 4y ago
    That's why they said "IF the way out". It seems like OP is asking for exactly the same numbers you are - do we need to invest more in making sure things are available/produced? Or will more money just lead to more demand in ways that make things worse like how you've described.
crypto420_69 4y ago
He mentioned the 1970's and 80's five times, which was a period of high inflation, high rates and civil unrest. From https://en.wikipedia.org/wiki/Paul_Volcker#Chairman_of_the_F https://en.wikipedia.org/wiki/Paul_Volcker#Chairman_of_the_F...: "Volcker's Federal Reserve board elicited the strongest political attacks and most widespread protests in the history of the Federal Reserve (unlike any protests experienced since 1922), due to the effects of high interest rates on the construction, farming, and industrial sectors, culminating in indebted farmers driving their tractors onto C Street NW in Washington, D.C. and blockading the Eccles Building. US monetary policy eased in 1982, helping lead to a resumption of economic growth" TL;DR it's going to get ugly
akomtu 4y ago
The more I'm watching this show, the more I think that it's just trimming excess wealth off the middle class.
- throwaway0a5e 4y ago
  Which middle class are we talking about? The plumbers and nurses or the techies and doctors? Because I think the former would justifiably be very, very, very happy to see the latter take a big haircut since the latter's money is a large part of what's propping up asset prices (and the prices of many consumer goods) and directly reducing the access the former has to such things.
  - lotsofpulp 4y ago
    I always love seeing the uselessness of the term “middle class”. Or rather, lack of utility. Politically, it is a very useful term.
    - dominotw 4y ago
      Middle class was defined by whitehouse recently wrt student debt cancellation as anyone who isn't in top 5% of income ( i.e household income of < 250k).
      - DIARRHEA_xd 4y ago
        Pretty meaningless without location.
rhacker 4y ago
At the height of the gas prices I paid $8.00 per gallon of diesel for several weeks (some drunk asshole totaled my other non-diesel vehicle) so I felt what truck drivers felt. It should be no surprise that when gas doubles, everything that is carried on those trucks goes up in price. When the truck is carrying super cheap items, the price of those super cheap items is roughly double. Transportation cost of expensive and small things aren't affected as much because the price of gas was already a smaller percentage of the overall price. Large items, like RVs saw a roughly $4k markup (in CA) because they literally drive each one from Indiana. Not to mention everyone is buying them because they are alternatives to expensive homes now. We really need to get off gasoline and encourage people to build. Messing with inflation with the feds "only tool" is fucking idiotic.
- superb-owl 4y ago
  Agreed. An excessive money supply is a small part of the problem here. There are intrinsic economic issues (e.g. supply chain problems) that need to be solved.
- megaman821 4y ago
  We have the technology today to have the vast, vast majority of our transportation miles powered by electricity, and the ability to generate electricity from numerous sources. Like you said, out of control energy prices ripple to everything else. Electrifying everything provides a counterbalance to the volatility of oil on the global market.
compumike 4y ago
I made a little side project https://totalrealreturns.com/ https://totalrealreturns.com/ to plot inflation-adjusted asset and asset class returns, including the USDOLLAR virtual symbol which represents a nominal dollar. (Most users just enter symbols they care about, though.) In real (purchasing power) terms, I think this announcement means: 1. The Fed thinks the green line is declining too fast. (Green line = purchasing power of a nominal USDOLLAR, such as a paper dollar bill, or a zero-interest checking account.) 2. In order to make the green line flatten out a bit, we're going to raise interest rates more, reducing the supply of capital. 3. In the short-term to medium-term, raising interest rates will have an adverse effect on the blue line (bonds), due to interest rate sensitivity. 4. In the medium to long term, the effect on bonds may in fact be positive due to higher interest rates, but this depends on future Fed actions as well. (It seems to me structurally unlikely to create substantially positive real retuns for treasury bonds, at least. Maybe corporate bonds will benefit.) 5. Raising interest rates is intended explicitly to reduce aggregate demand in the short-term to medium-term. This reduces corporate revenues and corporate profits, which should hurt the red line (equities). 6. Raising interest rates also increases the discount rate which is applied to net-present-value (NPV) calculations, which means that future cash flows are discounted more heavily. This should also hurt the red line (equities).
- dmix 4y ago
  That's really cool. Why is the red line diverging from the blue line, since they seemed to be connected earlier in the graph?
  - compumike 4y ago
    We're talking about long time periods, but my sense is that the real return of bonds (blue line) has slowed, while the real returns of equities (red line) has not. If nothing else, it seems like bonds increasingly require investors to take on long duration risk (and more interest rate sensitivity) in order to realize positive real returns, while short-duration bonds barely or do not even keep up with inflation anymore: https://totalrealreturns.com/s/VFISX,VFITX,VUSTX https://totalrealreturns.com/s/VFISX,VFITX,VUSTX for a duration comparison on Treasuries.
superb-owl 4y ago
> Inflation feeds in part on itself, so part of the job of returning to a more stable and more productive economy must be to break the grip of inflationary expectations. There were several months where officials continued to refer to inflation as "transitory," when it was obviously anything but. I wonder how much that was deliberately misleading, in an attempt to stem inflation by adjusting people's expectations. And I wonder how bad it might have gotten if officials had told the full truth.
- jbay808 4y ago
  That trick is a double-edged sword, because those predictions were ultimately incorrect, which reduces credibility. Now even an honest forecast of declining inflation is less likely to influence expectations, making stronger action is necessary.
ra7 4y ago
What is the general recommendation for buying a house in this economic climate? Hold off until interest rates go down or just buy if you are ready and not time the market?
- lotsofpulp 4y ago
  Same as everything else. If you like it, you can afford it, and you think it will provide you sufficient utility relative to the price you pay (this would be based on your available options), then you buy it.
- hedora 4y ago
  Assuming you plan to live in the house, I wouldn't try to time it. Inflation could cause the price of houses to skyrocket (and the value of your down payment to tank), and interest rates will certainly increase for the next few years. Current prices reflect people's best guess as to which way things will move. If you want to buy as an investment, I suggest diversifying as much as possible. If you already have enough assets to tolerate the additional risk and can still get a sub-5% mortgage, then maybe buy an investment property right now (in expectation, it's still free money at those rates, and, even if the market tanks, the price of the house will probably bounce back in the long term).
- dominotw 4y ago
  noone knows, like everything else in the economy atm. Buyers and sellers are at a stalemate watching what happens next.
- richiebful1 4y ago
  I just bought a house and it seems like a smart investment so far. I am renting out half the house, which pays for almost all of the mortgage. Since rent has been going up about as fast as the total cost of a mortgage has, it doesn't really affect my decision.
- oramit 4y ago
  Real estate is very local and housing is a necessity so its not a purchase you can think about like a pure investment. I am finally in a place where I am looking to move to a house (currently in a condo) and am very happy that rates are increasing right now. The local real estate market has slowed considerably and I've watched multiple listings of mediocre houses with huge price tags sit for a month before being quietly delisted. It seems like sellers are just now realizing that the days of one weekend of open house followed by multiple competing offers are over. The overpriced flips are getting hammered right now. Well priced properties are still moving, but it will take time for the new reality to filter through the market. Personally I'm giving it about a year to see where things are next summer. I'm hopeful that the interest rate increase causes prices to drop but real estate prices (like wages) are sticky. Prices may come down, but sellers could also just decide to hold off and hoard. Hard to tell.

74 points by kamaraju 4y ago

digdugdirk 4y ago

Can someone more fluent in economist-speak please help explain what was said here?

Afforess 4y ago
Interest rate hikes will continue until inflation subsidies and interest rates will remain high after that. "Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy"
- cyberlurker 4y ago
  Right, do not expect rates near 0 in the foreseeable future and as a follow on to that, mortgage rates will go up. So if you are locked in for 30 years with a mortgage purchased the last few years, you did well.
  - paulmd 4y ago
    > So if you are locked in for 30 years with a mortgage purchased the last few years, you did well. Unless prices go down and you end up losing a bunch of money (or worse, underwater). That's the problem, rates and housing prices don't exist in isolation. People don't generally care about the actual sticker price of the house, they care about what the monthly payment is going to be, so lower interest rates imply willingness to bid higher... and the opposite is also true, higher interest rates mean people can't afford to bid as high and sale prices go down. Essentially, people are locked in at higher principal/lower interest, but now the housing market is moving towards lower principal/higher interest, and that means that a huge amount of housing "net worth" (whether current or future) just evaporated for a lot of people. Your $300k house is now a $250k house again and you just lost all that money you spent years paying down (inflation ain't the only way for value to evaporate). If interest rates double, then so does the interest portion of the mortgage for new homebuyers. It's not quite double, since some of the mortgage goes to principal, but it'll be almost double. And with the interest rate so low... it doesn't make much in "real terms" to make a big relative increase. I refi'd at... 2.75%? So if the fed raises interest rates from 0% to 2%, that nearly doubles my interest rate. Obviously I am not buying today but other people are, and that still determines the value of my asset. I suppose it's the old "don't buy the house as an investment, buy it to lock in a rent that you can afford" but it's definitely been worrying me. Thankfully the last few years have put me far enough ahead that I'm not in any danger even with a big dip. And I suppose the counterargument is that institutional buyers are still making big cash offers, so maybe there won't be that much of a dip. But without the hike, values would have gone higher, it's still a loss of expected value. And the institutional investors aspect of the market is really not a great thing either right now.
    - cyberlurker 4y ago
      Yea, we don't know which way anything is going to go so it might end up being better to wait. As of now though, home prices haven't dropped much in many areas due to lack of supply. I think both positions have merit, but for a variety of reasons I think the lower rate home is the better position. And you also don't really “lose” money, but yes the house value on paper could go down from the historic highs.
- deleted 4y ago
  [deleted]
- crypto420_69 4y ago
  Not just that. He mentioned the 1970's and 80's five times, which was a period of high inflation, high rates and civil unrest. From https://en.wikipedia.org/wiki/Paul_Volcker#Chairman_of_the_Federal_Reserve https://en.wikipedia.org/wiki/Paul_Volcker#Chairman_of_the_F...: "Volcker's Federal Reserve board elicited the strongest political attacks and most widespread protests in the history of the Federal Reserve (unlike any protests experienced since 1922), due to the effects of high interest rates on the construction, farming, and industrial sectors, culminating in indebted farmers driving their tractors onto C Street NW in Washington, D.C. and blockading the Eccles Building. US monetary policy eased in 1982, helping lead to a resumption of economic growth" TL;DR it's going to get ugly
BayAreaEscapee 4y ago
He said, "We're going to jawbone a lot about inflation and make some token steps, but not actually do what will solve the issue. Who do you think I am, Paul Volsker? We're in debt trap and more worried about springing the trap than about persistent and high inflation. Don't worry, young whippersnapper, in the future you'll own nothing and you'll be happy!"
- zie 4y ago
  If inflation is due to supply, the Fed can't do anything about it. They can only affect the demand side of the equation, which they are doing.
baobob 4y ago
The beatings will continue until the yield curve improves
ddulaney 4y ago
For me, this is the money quote: > Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions. The Fed has some tools, most notably the interest rate, that can probably slow down inflation but at the cost of probably slowing down growth. A big question has been the degree to which the Fed will give up growth in order to try to reduce inflation. This speech makes it sound like the Fed is likely to trade off a lot of growth in order to hit inflation targets. What does that mean for most people? Probably bad things in the short term. > While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. It makes it sound like the Fed is willing to inflict some damage to hit its inflation target. This isn’t a change exactly, but it’s a confirmation about what lots of people have speculated might happen.
- deleted 4y ago
  [deleted]
- matwood 4y ago
  Yeah, between the lines it says 'wages are too high, so we need a recession to put the worker back in line'.
  - lotsofpulp 4y ago
    And outside the lines, we have a demographic problem with fewer and fewer young people to juice the economy and provide the labor needed to meet expected return on assets that went into many decisions borrowing wealth from the future.
  - hedora 4y ago
    Ok, but the actual mechanism will be to stop giving free money to the wealthy. This is an attack on the working class in roughly the same way trickle down economics is a subsidy of the working class.
- 4y ago
meltyness 4y ago
I think the key take aways are as follows. Prerequisite is the understanding that the Fed has a mandate to: maximize (productive?) employment, and maintain inflation at 2%. - Employment is very high, as it stands. The intention of easy money was to maintain purchasing power, and prevent household shocks due to government shutdowns during the pandemic. It is being used by companies to game the market, and win as evidenced by this change, producing demand-side inflation. - Productivity is low, as measured presumably by per-capita GDP projections. Indicating continued economic dislocations between prices and corporate activities. Investments are concentrating into unproductive sectors. Capital inflows aren't improving productivity, so the cost of productivity is going up -- supply-side inflation. - Households and businesses are still gobbling up a lot of debt OR a lot of savings, spurred on by USD inflation -- to employ those individuals, to live outside reasonable means -- or preparing "for the worst." This is the manifestation of the K-shaped recovery, where activities are significantly altered, in anticipation of near-term economic changes. Acquisitions probably would highlight this, but the branches of government have talked FAANG out of this but Broadcom-VMWare highlights a counterexample. The narrative that is latched onto by investors pertains to the Fed's intention to hike rates until employment begins to fall, he states that they're planning on "overshooting" the fed-funds rate, so that business investment will fall, and concentrate onto more reliable business-models. Jerome Powell also invoked Paul Volkert, basically to signal that risk assets are no longer a key-metric being observed.
- jason-phillips 4y ago
  > Investments are concentrating into unproductive sectors. With all the bullshit startups over the past decade or two, I thought this was accepted as the new normal.
  - meltyness 4y ago
    When Google ripped Microsoft a new Chrome, this was supposed to free up some gears, and it did -- because of under-investment in employees at the time, and the malleability of software it was all soft goods. Bottom line, the product improved. When Zillow rips the housing sector an expensive and unfunded demand for renovation -- this is where the "growth" investment thesis starts to break down, a massive acquisition of hard goods, made possible because of risk-asset price inflation. Bottom line, the product is worse for the foreseeable. It's icky, but thankfully these types of radioactive business models are getting identified sooner rather than later.
kyrra 4y ago
The fed during the 1970s brought down inflation for a little while, but it spiked again. The hope is that Powell has learned this lesson and will keep interest rates high enough for long enough to stop it from being more persistent. See: https://www.wsj.com/articles/jerome-powell-should-learn-from-arthur-burns-forward-guidance-tight-credit-interest-rate-hikes-1970s-inflation-federal-reserve-volcker-chairman-11661688352 https://www.wsj.com/articles/jerome-powell-should-learn-from... But then you have those that argue that inflation is a bit more transitory and different than the 1970s, as it is more supply chain induced. And if we keep interest rates high for too long, it will hurt the economy, as cheap money isn't the cause of inflation. See: https://www.wsj.com/articles/inflation-isnt-transitory-but-it-isnt-permanent-either-federal-reserve-interest-rates-oil-energy-costs-prices-11654113873 https://www.wsj.com/articles/inflation-isnt-transitory-but-i...
bedhead 4y ago
The fed is going to try to put the economy into a recession by jacking up rates in the hopes that it eviscerates demand which will (maybe, but I don't think so) bring inflation down by balancing supply and demand. Fun times.
gdubs 4y ago
I asked OpenAI to write it as an "explain like I'm five": [edit: which according to a comment below is a mix of copy paste and a 180 degree misreading, lol. I'd be curious if the synopsis would be better had I pasted his remarks rather than passed a link in, but I'm not at my desk to try rn.] The Federal Reserve is responsible for ensuring that the economy is stable and that inflation is low. In order to do this, they use a number of tools, one of which is interest rates. When the economy is doing well, the Fed will raise interest rates in order to prevent inflation from getting too high. When the economy is not doing well, the Fed will lower interest rates in order to encourage spending and help the economy grow. The Fed has been keeping interest rates low for a while now because the economy has not been doing well. However, as the economy has begun to improve, the Fed has been slowly raising interest rates. In his speech, Powell said that the Fed plans to continue to raise interest rates slowly as the economy continues to improve. However, he also said that the Fed is prepared to lower interest rates again if the economy begins to slow down.
- hedora 4y ago
  Unsurprisingly, the first part is apparently copy pasted from an intro macroeconomics text and the second half is exactly the opposite of what Powell said.

TekMol 4y ago

Here is my view on inflation: 1: The root of inflation is the printing of money 2: No government will reduce the printing of money. It is just too convenient. It is like taxing more and more without getting much complaints. 3: Governments will rather use tricks to lower inflation. Change the definition. Make laws to restrict prices. Subsidize the production of goods to make them cheaper. Conclusion: The value of money will go down the drain faster and faster forever.

Sparkle-san 4y ago
Inflation can exist without the printing of money so I'm not sure it qualifies as the root. Supply and demand seems more likely to be the root, which can be affected by the printing of money and by other things such as supply chain constraints.
- JackFr 4y ago
  Too much money chasing too few goods. The Fed can only control the too much money side of the equation. In the case of inflation do to a supply side shock to an inelastic good, that is necessities with few or no substitutes, there is nothing the Fed can do.
epgui 4y ago
The way I understand it (and this is not my area of expertise), this view could have been cutting-edge 50-100 years ago, but now it’s not really sophisticated enough.
- everybodyknows 4y ago
  It's not a bad sketch of inflation in countries where central bankers follow orders from the head of state, and the head of state needs to win elections. Such as Argentina, or Turkey.
- TekMol 4y ago
  Prove me wrong. The numbers I see (asset prices and monetary base both going up and up and nothing but up) are in sync with my view.

aluminussoma 4y ago

For as long as I can remember, there has been a vocal group of doomsayers predicting financial catastrophe. Powell's speech is like catnip to that group.

scotuswroteus 4y ago
Were you born in 2009? Because if your memory worked in 2008, you'll recall that massive government bailouts were required to prevent full on collapse: the doom you dismiss as though anyone fearing it is no less in control of their critical faculties than a household pet. That happened less than twenty years ago.
- AndyNemmity 4y ago
  Massive Government Bailouts may or may not have been required, however they occurred.
- aluminussoma 4y ago
  I was probably born long before you. And you are twisting my words.
- newaccount2021 4y ago
- boppo1 4y ago
  >massive government bailouts were required to prevent full on collapse *allegedly. We have no data on what would have happened if we'd let the banks fail, put their C-suites in jail and used bailout money as a safety net.

newaccount2021 4y ago

runnerup 4y ago

I'd like to find numbers which illuminate how much of the inflation is caused by lack of supply for relatively inelastic commodities. If the way out of shortages is to invest in more production, higher interest rates seems detrimental in the face of that type of inflation. If, on the other hand, inflation is caused by groups/individuals buying lots of silly things because they are flush with tons of cash, then rising interest rates should put a stop to speculative/impulse elastic spending. To me, it seems an important distinction whether "excess" cash is going towards buying elastic goods/services (peloton cycles, fancy grills, RTX3080 for gaming, etc) or simply fighting over shortages of inelastic goods (baby formula, bacteriostatic water, shipping space, gasoline, etc). I suspect that our largest improvement would come from investment in transportation infrastructure for goods -- all of that is super choked right now and it affects everything. Many people are concerned about the rising price of real-estate and I agree, but I'm not sure interest rates are fine-grained enough for this...ideally Congress could address that with Anti-NIMBY legislation and/or taxes on properties which are not lived in by their owners, which could be directly redistributed to anyone who purchases a new home.

onlyrealcuzzo 4y ago
> If the way out of shortages is to invest in more production, higher interest rates will be detrimental in the face of that type of inflation. Do you have numbers that show that's what people do when interest rates are low? I don't have numbers - but my suspicion is that they mostly just speculate on asset prices. Where was all the investment in the last 20 years that low interest rates should've brought on? What it did bring on was companies borrowing money to buy-back their shares to return >100% of profits to investors. And don't even get me started on how negative real interest rates are a negative wealth tax.
- noirbot 4y ago
  That's why they said "IF the way out". It seems like OP is asking for exactly the same numbers you are - do we need to invest more in making sure things are available/produced? Or will more money just lead to more demand in ways that make things worse like how you've described.

crypto420_69 4y ago

He mentioned the 1970's and 80's five times, which was a period of high inflation, high rates and civil unrest. From https://en.wikipedia.org/wiki/Paul_Volcker#Chairman_of_the_F https://en.wikipedia.org/wiki/Paul_Volcker#Chairman_of_the_F...: "Volcker's Federal Reserve board elicited the strongest political attacks and most widespread protests in the history of the Federal Reserve (unlike any protests experienced since 1922), due to the effects of high interest rates on the construction, farming, and industrial sectors, culminating in indebted farmers driving their tractors onto C Street NW in Washington, D.C. and blockading the Eccles Building. US monetary policy eased in 1982, helping lead to a resumption of economic growth" TL;DR it's going to get ugly

akomtu 4y ago

The more I'm watching this show, the more I think that it's just trimming excess wealth off the middle class.

throwaway0a5e 4y ago
Which middle class are we talking about? The plumbers and nurses or the techies and doctors? Because I think the former would justifiably be very, very, very happy to see the latter take a big haircut since the latter's money is a large part of what's propping up asset prices (and the prices of many consumer goods) and directly reducing the access the former has to such things.
- lotsofpulp 4y ago
  I always love seeing the uselessness of the term “middle class”. Or rather, lack of utility. Politically, it is a very useful term.
  - dominotw 4y ago
    Middle class was defined by whitehouse recently wrt student debt cancellation as anyone who isn't in top 5% of income ( i.e household income of < 250k).
    - DIARRHEA_xd 4y ago
      Pretty meaningless without location.

rhacker 4y ago

At the height of the gas prices I paid $8.00 per gallon of diesel for several weeks (some drunk asshole totaled my other non-diesel vehicle) so I felt what truck drivers felt. It should be no surprise that when gas doubles, everything that is carried on those trucks goes up in price. When the truck is carrying super cheap items, the price of those super cheap items is roughly double. Transportation cost of expensive and small things aren't affected as much because the price of gas was already a smaller percentage of the overall price. Large items, like RVs saw a roughly $4k markup (in CA) because they literally drive each one from Indiana. Not to mention everyone is buying them because they are alternatives to expensive homes now. We really need to get off gasoline and encourage people to build. Messing with inflation with the feds "only tool" is fucking idiotic.

superb-owl 4y ago
Agreed. An excessive money supply is a small part of the problem here. There are intrinsic economic issues (e.g. supply chain problems) that need to be solved.
megaman821 4y ago
We have the technology today to have the vast, vast majority of our transportation miles powered by electricity, and the ability to generate electricity from numerous sources. Like you said, out of control energy prices ripple to everything else. Electrifying everything provides a counterbalance to the volatility of oil on the global market.

compumike 4y ago

I made a little side project https://totalrealreturns.com/ https://totalrealreturns.com/ to plot inflation-adjusted asset and asset class returns, including the USDOLLAR virtual symbol which represents a nominal dollar. (Most users just enter symbols they care about, though.) In real (purchasing power) terms, I think this announcement means: 1. The Fed thinks the green line is declining too fast. (Green line = purchasing power of a nominal USDOLLAR, such as a paper dollar bill, or a zero-interest checking account.) 2. In order to make the green line flatten out a bit, we're going to raise interest rates more, reducing the supply of capital. 3. In the short-term to medium-term, raising interest rates will have an adverse effect on the blue line (bonds), due to interest rate sensitivity. 4. In the medium to long term, the effect on bonds may in fact be positive due to higher interest rates, but this depends on future Fed actions as well. (It seems to me structurally unlikely to create substantially positive real retuns for treasury bonds, at least. Maybe corporate bonds will benefit.) 5. Raising interest rates is intended explicitly to reduce aggregate demand in the short-term to medium-term. This reduces corporate revenues and corporate profits, which should hurt the red line (equities). 6. Raising interest rates also increases the discount rate which is applied to net-present-value (NPV) calculations, which means that future cash flows are discounted more heavily. This should also hurt the red line (equities).

dmix 4y ago
That's really cool. Why is the red line diverging from the blue line, since they seemed to be connected earlier in the graph?
- compumike 4y ago
  We're talking about long time periods, but my sense is that the real return of bonds (blue line) has slowed, while the real returns of equities (red line) has not. If nothing else, it seems like bonds increasingly require investors to take on long duration risk (and more interest rate sensitivity) in order to realize positive real returns, while short-duration bonds barely or do not even keep up with inflation anymore: https://totalrealreturns.com/s/VFISX,VFITX,VUSTX https://totalrealreturns.com/s/VFISX,VFITX,VUSTX for a duration comparison on Treasuries.

superb-owl 4y ago

> Inflation feeds in part on itself, so part of the job of returning to a more stable and more productive economy must be to break the grip of inflationary expectations. There were several months where officials continued to refer to inflation as "transitory," when it was obviously anything but. I wonder how much that was deliberately misleading, in an attempt to stem inflation by adjusting people's expectations. And I wonder how bad it might have gotten if officials had told the full truth.

jbay808 4y ago
That trick is a double-edged sword, because those predictions were ultimately incorrect, which reduces credibility. Now even an honest forecast of declining inflation is less likely to influence expectations, making stronger action is necessary.

ra7 4y ago

What is the general recommendation for buying a house in this economic climate? Hold off until interest rates go down or just buy if you are ready and not time the market?

lotsofpulp 4y ago
Same as everything else. If you like it, you can afford it, and you think it will provide you sufficient utility relative to the price you pay (this would be based on your available options), then you buy it.
hedora 4y ago
Assuming you plan to live in the house, I wouldn't try to time it. Inflation could cause the price of houses to skyrocket (and the value of your down payment to tank), and interest rates will certainly increase for the next few years. Current prices reflect people's best guess as to which way things will move. If you want to buy as an investment, I suggest diversifying as much as possible. If you already have enough assets to tolerate the additional risk and can still get a sub-5% mortgage, then maybe buy an investment property right now (in expectation, it's still free money at those rates, and, even if the market tanks, the price of the house will probably bounce back in the long term).
dominotw 4y ago
noone knows, like everything else in the economy atm. Buyers and sellers are at a stalemate watching what happens next.
richiebful1 4y ago
I just bought a house and it seems like a smart investment so far. I am renting out half the house, which pays for almost all of the mortgage. Since rent has been going up about as fast as the total cost of a mortgage has, it doesn't really affect my decision.
oramit 4y ago
Real estate is very local and housing is a necessity so its not a purchase you can think about like a pure investment. I am finally in a place where I am looking to move to a house (currently in a condo) and am very happy that rates are increasing right now. The local real estate market has slowed considerably and I've watched multiple listings of mediocre houses with huge price tags sit for a month before being quietly delisted. It seems like sellers are just now realizing that the days of one weekend of open house followed by multiple competing offers are over. The overpriced flips are getting hammered right now. Well priced properties are still moving, but it will take time for the new reality to filter through the market. Personally I'm giving it about a year to see where things are next summer. I'm hopeful that the interest rate increase causes prices to drop but real estate prices (like wages) are sticky. Prices may come down, but sellers could also just decide to hold off and hoard. Hard to tell.