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>Whether the Fed actually has the technical tools to do this is another question. its unlikely the fed is reactive enough in the short term to have any real ef

>Whether the Fed actually has the technical tools to do this is another question. its unlikely the fed is reactive enough in the short term to have any real effect on inflation presuming its tooling is effective. the interest rate hike took six months to implement, and began with a quarter of one percent increase. this was before earnings reports for the prior christmas holiday but november itself was a sobering enough red flag that Powell should have immediately pushed for 1% or more. its taken us nearly a year to arrive at the 3% we're at now, but in my opinion this inflation wont stop for another year, and it wont stop even at clinton-era interest rates of almost 6%. Quantitative easing --and the feds decade long addiction to it-- make this thoroughly uncharted territory. the interest rate push will likely be the straw that breaks corporate real estate, no matter how hard Bloomberg pounds his fists and demands a return to cubicles in his newspaper. this will likely tumble back into another residential housing or auto lending crisis. The student loan forgiveness push and reforms on wage garnishment also send a clear signal that our nations 1.73 trillion dollar nickelodeon of perpetual youth debt is becoming a serious threat as well.

subsubzero 4y ago
I agree on this thesis, the crux of the problem and I have told many people about this, was the handouts given during covid. It was totally scattershot and should have been more targeted. In addition states like California and others extended payouts way longer than they should have(and had way over-generous unemployment) which led to entire industries being completely short staffed. This led to extreme raises in wages and started a spiral of inflation that started at the bottom of the economic tiers and has worked its way up. Couple that with China doing zero tolerance covid lockdowns our supply chain is completely strangled which is also adding fuel to the fire, and making prices shoot up even further. Real estate sales have completely frozen as prices for all houses are priced in at a 3% interest rate and buyers will not entertain 25-30% cuts in price. Against this backdrop California plans on distributing $9.5B to any family who makes under a certain amount of money($1k each), I expect this huge infusion of cash to make inflation even worse and I do not know where this will go except that it will not be pretty.
- PaulRobinson 4y ago
  The empirical evidence for wage rises causing inflation is so weak, few economists take it seriously as an argument against wage rises. The evidence for supply chain issues - as you mention - and price gouging being contributory causes is much more convincing. If you are not convinced that price gouging is going on, consider profit levels in energy companies in recent months. Please don't blame this on workers who if anything need to be paid more, and paying them more will not impact inflation, only make it easier to cope with. It may even bring inflation down if jobs in supply chains become more attractive and force profiteers to become more competitive.
  - nradov 4y ago
    Blaming inflation on price gouging seems way too facile and subjective. What is price gouging anyway? In the years that energy companies lost money were they doing the reverse of gouging?
    - mustacheemperor 4y ago
      Why is it more facile and subjective to blame the real visible increases in consumer product and material supply prices than to blame "extreme raises in wages starting a spiral of inflation that started at the bottom of the economic tiers and has worked its way up?" I just don't see there being any more reasonable objective cause and effect to that claim than the claim made by the commenter you are replying to. On the other hand in my own industry, prices for materials like lumber and steel have shot up massively causing major follow-on effects, and nobody at the steel mills are blaming worker salary for it. They're blaming the costs of the raw materials. And the people on the job site aren't blaming the tradespeople wages for the project going over budget, they're blaming the high cost of the steel showing up on site, late. When workers are an issue for project delivery or budget it's usually not what they're charging, it's just availability. There are simply not enough field workers out there who can drive steel rivets or manage a punchlist. In fact, I hear rising wages brought up as a potential way to attract more people to the those field roles, because right now there are not enough people entering those roles.
omgwtfbyobbq 4y ago
IIRC, Powell compared the Feds current efforts to tame inflation similar efforts in the 70s/80s, so fast in that context is over a few years instead of over a decade or more.
deleted 4y ago
[deleted]
credit_guy 4y ago
Money is just a different word for credit. Credit comes from credibility, or trust. If a bank trusts a company that they can repay a loan, they'll extend the loan. But if there's a credibility problem, they won't. At the margin, when interest rates go up some companies will cease to be profitable. Banks know intimately how profitable their borrowers are. Even if they have doubts, the income statements will show. So, when the times comes to refinance the loan, the rate may be increased, or the credit line decreased, or new covenants may be put in place, or some collateral required, or various combinations of these. Corporations (and especially those rated "high yield", or non-investment grade) will see a double-whammy: not only interest rates will have gone up significantly (by 4% early next year), but also their credit spread will go up (see [1], on average it has gone from 3% at the beginning of 2022 to 5% now, and it will keep going up). That creates the start of a feedback loop: with the increased burden of servicing debt, companies will become less profitable, some will start cutting headcount (just look at the HN posts lately and see how often layoffs are mentioned). Of course, there's the other feedback loop: higher interest rates means higher discounting of future corporate dividends, dividends which will be smaller anyway, so that means lower stock prices. People will see their savings taking a hit. And then, a combination of lower savings and higher job uncertainty will lead to lower consumer spending. Or demand destruction. Which is what the Fed wants. Make no mistake: the Fed is still the most powerful actor in the financial markets. By far. It has all the tools needed to fight the inflation, and then some. [1] https://fred.stlouisfed.org/series/BAMLH0A0HYM2 https://fred.stlouisfed.org/series/BAMLH0A0HYM2

subsubzero 4y ago

I agree on this thesis, the crux of the problem and I have told many people about this, was the handouts given during covid. It was totally scattershot and should have been more targeted. In addition states like California and others extended payouts way longer than they should have(and had way over-generous unemployment) which led to entire industries being completely short staffed. This led to extreme raises in wages and started a spiral of inflation that started at the bottom of the economic tiers and has worked its way up. Couple that with China doing zero tolerance covid lockdowns our supply chain is completely strangled which is also adding fuel to the fire, and making prices shoot up even further. Real estate sales have completely frozen as prices for all houses are priced in at a 3% interest rate and buyers will not entertain 25-30% cuts in price. Against this backdrop California plans on distributing $9.5B to any family who makes under a certain amount of money($1k each), I expect this huge infusion of cash to make inflation even worse and I do not know where this will go except that it will not be pretty.

PaulRobinson 4y ago
The empirical evidence for wage rises causing inflation is so weak, few economists take it seriously as an argument against wage rises. The evidence for supply chain issues - as you mention - and price gouging being contributory causes is much more convincing. If you are not convinced that price gouging is going on, consider profit levels in energy companies in recent months. Please don't blame this on workers who if anything need to be paid more, and paying them more will not impact inflation, only make it easier to cope with. It may even bring inflation down if jobs in supply chains become more attractive and force profiteers to become more competitive.
- nradov 4y ago
  Blaming inflation on price gouging seems way too facile and subjective. What is price gouging anyway? In the years that energy companies lost money were they doing the reverse of gouging?
  - mustacheemperor 4y ago
    Why is it more facile and subjective to blame the real visible increases in consumer product and material supply prices than to blame "extreme raises in wages starting a spiral of inflation that started at the bottom of the economic tiers and has worked its way up?" I just don't see there being any more reasonable objective cause and effect to that claim than the claim made by the commenter you are replying to. On the other hand in my own industry, prices for materials like lumber and steel have shot up massively causing major follow-on effects, and nobody at the steel mills are blaming worker salary for it. They're blaming the costs of the raw materials. And the people on the job site aren't blaming the tradespeople wages for the project going over budget, they're blaming the high cost of the steel showing up on site, late. When workers are an issue for project delivery or budget it's usually not what they're charging, it's just availability. There are simply not enough field workers out there who can drive steel rivets or manage a punchlist. In fact, I hear rising wages brought up as a potential way to attract more people to the those field roles, because right now there are not enough people entering those roles.

omgwtfbyobbq 4y ago

IIRC, Powell compared the Feds current efforts to tame inflation similar efforts in the 70s/80s, so fast in that context is over a few years instead of over a decade or more.

deleted 4y ago

[deleted]

credit_guy 4y ago

Money is just a different word for credit. Credit comes from credibility, or trust. If a bank trusts a company that they can repay a loan, they'll extend the loan. But if there's a credibility problem, they won't. At the margin, when interest rates go up some companies will cease to be profitable. Banks know intimately how profitable their borrowers are. Even if they have doubts, the income statements will show. So, when the times comes to refinance the loan, the rate may be increased, or the credit line decreased, or new covenants may be put in place, or some collateral required, or various combinations of these. Corporations (and especially those rated "high yield", or non-investment grade) will see a double-whammy: not only interest rates will have gone up significantly (by 4% early next year), but also their credit spread will go up (see [1], on average it has gone from 3% at the beginning of 2022 to 5% now, and it will keep going up). That creates the start of a feedback loop: with the increased burden of servicing debt, companies will become less profitable, some will start cutting headcount (just look at the HN posts lately and see how often layoffs are mentioned). Of course, there's the other feedback loop: higher interest rates means higher discounting of future corporate dividends, dividends which will be smaller anyway, so that means lower stock prices. People will see their savings taking a hit. And then, a combination of lower savings and higher job uncertainty will lead to lower consumer spending. Or demand destruction. Which is what the Fed wants. Make no mistake: the Fed is still the most powerful actor in the financial markets. By far. It has all the tools needed to fight the inflation, and then some. [1] https://fred.stlouisfed.org/series/BAMLH0A0HYM2 https://fred.stlouisfed.org/series/BAMLH0A0HYM2