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Not only it's not high compared to historical rates but worse I think is that Fed's real interest rate is still in the negative territory: January CPI report he

by almog 4y ago

Not only it's not high compared to historical rates but worse I think is that Fed's real interest rate is still in the negative territory: January CPI report headline came at 6.3% YoY and core at 5.3% YoY (it's negative with current rates even if you use the PCE index as a baseline, which is the Fed's favorite index to measure inflation).

shjake 4y ago
Annualized inflation in last quarter was just 3.1% and Core was 4.6%. The peak in Q2 was 10.5% and 6.6%. So looking just at the YoY figure is problematic cause it’s a strongly lagging indicator. Of course it depends if the current trend continues. It starting going back up in January so it might not (then again certain components in CPI like housing generally tend to lag more than others).
roflyear 4y ago
seems the consensus is "a little more inflation" is better than "a bigger recession" which is probably true. People are still trying to get on their feet, and inflation is "felt" a lot less than losing your job (and not being able to find a new one for a long time).
- mym1990 4y ago
  It depends on a person's financial situation, from my understanding: if you have a lot of debt(which the average USA household does), you benefit greatly the more inflation goes up. If you have money sitting in the bank, you're basically getting eaten alive. If you have assets, they typically should be tracking inflation somewhat(real estate, some stock categories, TIPS, etc...). People will be in between any of the above situation simultaneously, but between having to get fired and seeing costs go up a little at a time, I imagine most people will defer the gut punch and take the erosion of spending power.
  - ethbr0 4y ago
    There's also one big winner in an inflationary environment: the US federal government, who happens to owe a LOT of debt. Inflation shrinks the present value of that debt, without requiring the government to cut spending to pay it down, which would have serious economic consequences (see: austerity).
  - tempsy 4y ago
    how is a saver getting eaten alive when high yield savings accounts and short term t-bills are paying 5% holding cash is paying something for the first time in more than a decade
    - positr0n 4y ago
      Because you don't care about the number in your bank account, you care about what you can buy with that number. Park your cash in a 5% instrument for a year and you can still afford 3-4% less stuff than you could at the beginning of the year. That's fine for me with a mortgage, but less retirement headroom for many older people.
    - roflyear 4y ago
      Cash was paying out plenty a few years ago.
    - mym1990 4y ago
      Because inflation was still anywhere from 6-9% on average, but was higher than that for things like housing, healthcare, education, food, and transportation. Holding cash is not "paying" anything, even though you can't see it happen, the purchase power of that cash has deteriorated massively in the past 3 years. I personally have a hard time going out to a restaurant and getting a 2 person meal for less than say 30-40$. Car market is absolutely through the roof. Housing market, although cooling slightly, is still through the roof. Our base rent went up 15% last year. Gas is now double in my area.
- bradleyjg 4y ago
  Not sure whose consensus that is, but I don’t think it’s central bankers’. Their ability to fight inflation is tied up in market participants believing they will do what it takes to do so even in the face of harsh costs. If that reputation comes into doubt, we could end up with the worst of both worlds.
  - roflyear 4y ago
    Maybe, but it seems to be what most investing-minded people seem to be ok with. I'm just a guy on the internet sharing my thoughts, btw.
- almog 4y ago
  Claiming that "a little more inflation" is preferred to "a bigger recession" is an opinion, I'm really not sure it's a consensus, though even if it is a consensus, it's not a good argument for or against it. I think it comes down to whether we soon realize we're near hard landing (recession) or no landing (ongoing inflation). As far as I know (though I'm really not well educated when it comes to economy), in the entire Fed's history, inflation has never just disappeared by itself without restrictive financial conditions. I think it wouldn't be hard to argue why a no landing scenario could be worse than recession. As to the soft landing scenario, sure, it might happen but based on what followed past inflation, it seems unlikely (if I'm not mistaken soft landing was only achieved once in the mid 90's and with a much lower inflation than we see now.
  - roflyear 4y ago
    Well yes, but like I said, it seems like most people feel this is the good approach in my experience. I dunno if it is a good thing or not...
  - spatley 4y ago
    I am starting to doubt that interest rates are the best lever against inflation. Rising prices are supply not meeting demand. It feels like improving productivity would be an equally powerful tool with less human cost. Granted that is a harder thing to control quarter over quarter. Consider this analysis that intetest rates may in some cases raise prices. https://economicsfromthetopdown.com/2023/02/04/do-high-interest-rates-reduce-inflation-a-test-of-monetary-faith/ https://economicsfromthetopdown.com/2023/02/04/do-high-inter... And more links along that line from the pluralistic blog. https://pluralistic.net/2023/02/04/if-i-was-a-horse/#friedman-was-a-dolt https://pluralistic.net/2023/02/04/if-i-was-a-horse/#friedma... Does anybody else hear talk of productivity in talk of inflation?
    - imtringued 4y ago
      Raising interest rates on its own doesn't do anything about inflation at all, actually. When you raise interest rates you are decreasing demand for borrowing but even that on its own doesn't decrease inflation. Inflation slows down as people pay off their debts as this destroys money that was previously created through loans. It's basically a side effect, not the main effect. If you have a bankrupt government that can't afford interest payments, then raising interest rates will just lead to borrowing more money to pay the interest in a vicious cycle until hyperinflation sets in. If you can limit borrowing and speed up payback of debts through any means other than raising interest rates you achieve the same effect much sooner.
- b33j0r 4y ago
  This conversation needs someone fiddling in the background. No one had a normal economic life for several years. It’s a miracle that these levers have been adjusted to the point that everyone is like “well no one going to work for three years had no impact! What over-reactionaries!”
  - ceejayoz 4y ago
    > no one going to work for three years Where did this happen?
    - zamnos 4y ago
      I'm not sure about three years, but anywhere the service and entertainment industry was shut down due to Covid. Eg California.
      - noah_buddy 4y ago
        It was not even a year before people in the film business were returning to sets.
      - midasuni 4y ago
        No nobody works in California outside of that industry?
      - realjhol 4y ago
        Not due to covid - due to government's hysterical overreaction to covid
        koudelka 4y ago
        for the purposes of this conversation, that’s a distinction without a difference
        School-Cotton 4y ago
        It’s important to keep the distinction in mind. We can’t forget that the hardship we imposed on ourselves was a choice, and that we could have chosen differently.
boppo1 4y ago
How does one determine the 'real' interest rate?
- raincom 4y ago
  Nominal interest rate = inflation + real interest rate, now your question boils down to 'how does one determine inflation?'
- jcalvinowens 4y ago
  https://en.m.wikipedia.org/wiki/Real_interest_rate https://en.m.wikipedia.org/wiki/Real_interest_rate
- jaggederest 4y ago
  To parallel the other comment with a wiki leak, the short version is the risk-free interest rate (e.g. treasury bills) minus the rate of inflation. So if you have 6% inflation, and the return on e.g. the 1 year t bill is 4.75%, you have -1.25% "real" interest rates, because your money at the end of your year of investment will be worth ~1.23% less than it was at the beginning of the year. I'm not sure I completely agree that the result is actually as bad as that, since stuffing your money in the mattress would put you -5.5% in the hole by comparison, but still.
  - hayksaakian 4y ago
    does that really work? inflation is a backward looking metric and interest rates are forward looking. this is just about making a prediction of the future. if you believe that inflation will decrease then your guaranteed rate of return from interest rates is great. if you believe that inflation will increase or stay the same, then yes we have "negative interest rates" I don't think it's reasonable to call it a "real" interest rate, because I can't buy T bills against it and it has no guarantees
    - niij 4y ago
      https://en.wikipedia.org/wiki/Real_versus_nominal_value_(economics) https://en.wikipedia.org/wiki/Real_versus_nominal_value_(eco...

by almog 4y ago

shjake 4y ago

Annualized inflation in last quarter was just 3.1% and Core was 4.6%. The peak in Q2 was 10.5% and 6.6%. So looking just at the YoY figure is problematic cause it’s a strongly lagging indicator. Of course it depends if the current trend continues. It starting going back up in January so it might not (then again certain components in CPI like housing generally tend to lag more than others).

roflyear 4y ago

seems the consensus is "a little more inflation" is better than "a bigger recession" which is probably true. People are still trying to get on their feet, and inflation is "felt" a lot less than losing your job (and not being able to find a new one for a long time).

mym1990 4y ago
It depends on a person's financial situation, from my understanding: if you have a lot of debt(which the average USA household does), you benefit greatly the more inflation goes up. If you have money sitting in the bank, you're basically getting eaten alive. If you have assets, they typically should be tracking inflation somewhat(real estate, some stock categories, TIPS, etc...). People will be in between any of the above situation simultaneously, but between having to get fired and seeing costs go up a little at a time, I imagine most people will defer the gut punch and take the erosion of spending power.
- ethbr0 4y ago
  There's also one big winner in an inflationary environment: the US federal government, who happens to owe a LOT of debt. Inflation shrinks the present value of that debt, without requiring the government to cut spending to pay it down, which would have serious economic consequences (see: austerity).
- tempsy 4y ago
  how is a saver getting eaten alive when high yield savings accounts and short term t-bills are paying 5% holding cash is paying something for the first time in more than a decade
  - positr0n 4y ago
    Because you don't care about the number in your bank account, you care about what you can buy with that number. Park your cash in a 5% instrument for a year and you can still afford 3-4% less stuff than you could at the beginning of the year. That's fine for me with a mortgage, but less retirement headroom for many older people.
  - roflyear 4y ago
    Cash was paying out plenty a few years ago.
  - mym1990 4y ago
    Because inflation was still anywhere from 6-9% on average, but was higher than that for things like housing, healthcare, education, food, and transportation. Holding cash is not "paying" anything, even though you can't see it happen, the purchase power of that cash has deteriorated massively in the past 3 years. I personally have a hard time going out to a restaurant and getting a 2 person meal for less than say 30-40$. Car market is absolutely through the roof. Housing market, although cooling slightly, is still through the roof. Our base rent went up 15% last year. Gas is now double in my area.
bradleyjg 4y ago
Not sure whose consensus that is, but I don’t think it’s central bankers’. Their ability to fight inflation is tied up in market participants believing they will do what it takes to do so even in the face of harsh costs. If that reputation comes into doubt, we could end up with the worst of both worlds.
- roflyear 4y ago
  Maybe, but it seems to be what most investing-minded people seem to be ok with. I'm just a guy on the internet sharing my thoughts, btw.
almog 4y ago
Claiming that "a little more inflation" is preferred to "a bigger recession" is an opinion, I'm really not sure it's a consensus, though even if it is a consensus, it's not a good argument for or against it. I think it comes down to whether we soon realize we're near hard landing (recession) or no landing (ongoing inflation). As far as I know (though I'm really not well educated when it comes to economy), in the entire Fed's history, inflation has never just disappeared by itself without restrictive financial conditions. I think it wouldn't be hard to argue why a no landing scenario could be worse than recession. As to the soft landing scenario, sure, it might happen but based on what followed past inflation, it seems unlikely (if I'm not mistaken soft landing was only achieved once in the mid 90's and with a much lower inflation than we see now.
- roflyear 4y ago
  Well yes, but like I said, it seems like most people feel this is the good approach in my experience. I dunno if it is a good thing or not...
- spatley 4y ago
  I am starting to doubt that interest rates are the best lever against inflation. Rising prices are supply not meeting demand. It feels like improving productivity would be an equally powerful tool with less human cost. Granted that is a harder thing to control quarter over quarter. Consider this analysis that intetest rates may in some cases raise prices. https://economicsfromthetopdown.com/2023/02/04/do-high-interest-rates-reduce-inflation-a-test-of-monetary-faith/ https://economicsfromthetopdown.com/2023/02/04/do-high-inter... And more links along that line from the pluralistic blog. https://pluralistic.net/2023/02/04/if-i-was-a-horse/#friedman-was-a-dolt https://pluralistic.net/2023/02/04/if-i-was-a-horse/#friedma... Does anybody else hear talk of productivity in talk of inflation?
  - imtringued 4y ago
    Raising interest rates on its own doesn't do anything about inflation at all, actually. When you raise interest rates you are decreasing demand for borrowing but even that on its own doesn't decrease inflation. Inflation slows down as people pay off their debts as this destroys money that was previously created through loans. It's basically a side effect, not the main effect. If you have a bankrupt government that can't afford interest payments, then raising interest rates will just lead to borrowing more money to pay the interest in a vicious cycle until hyperinflation sets in. If you can limit borrowing and speed up payback of debts through any means other than raising interest rates you achieve the same effect much sooner.
b33j0r 4y ago
This conversation needs someone fiddling in the background. No one had a normal economic life for several years. It’s a miracle that these levers have been adjusted to the point that everyone is like “well no one going to work for three years had no impact! What over-reactionaries!”
- ceejayoz 4y ago
  > no one going to work for three years Where did this happen?
  - zamnos 4y ago
    I'm not sure about three years, but anywhere the service and entertainment industry was shut down due to Covid. Eg California.
    - noah_buddy 4y ago
      It was not even a year before people in the film business were returning to sets.
    - midasuni 4y ago
      No nobody works in California outside of that industry?
    - realjhol 4y ago
      Not due to covid - due to government's hysterical overreaction to covid
      - koudelka 4y ago
        for the purposes of this conversation, that’s a distinction without a difference
        School-Cotton 4y ago
        It’s important to keep the distinction in mind. We can’t forget that the hardship we imposed on ourselves was a choice, and that we could have chosen differently.

boppo1 4y ago

How does one determine the 'real' interest rate?

raincom 4y ago
Nominal interest rate = inflation + real interest rate, now your question boils down to 'how does one determine inflation?'
jcalvinowens 4y ago
https://en.m.wikipedia.org/wiki/Real_interest_rate https://en.m.wikipedia.org/wiki/Real_interest_rate
jaggederest 4y ago
To parallel the other comment with a wiki leak, the short version is the risk-free interest rate (e.g. treasury bills) minus the rate of inflation. So if you have 6% inflation, and the return on e.g. the 1 year t bill is 4.75%, you have -1.25% "real" interest rates, because your money at the end of your year of investment will be worth ~1.23% less than it was at the beginning of the year. I'm not sure I completely agree that the result is actually as bad as that, since stuffing your money in the mattress would put you -5.5% in the hole by comparison, but still.
- hayksaakian 4y ago
  does that really work? inflation is a backward looking metric and interest rates are forward looking. this is just about making a prediction of the future. if you believe that inflation will decrease then your guaranteed rate of return from interest rates is great. if you believe that inflation will increase or stay the same, then yes we have "negative interest rates" I don't think it's reasonable to call it a "real" interest rate, because I can't buy T bills against it and it has no guarantees
  - niij 4y ago
    https://en.wikipedia.org/wiki/Real_versus_nominal_value_(economics) https://en.wikipedia.org/wiki/Real_versus_nominal_value_(eco...