8 ms·

The Federal Reserve is expected to increase interest rates by a quarter point

50 points by andrekandre 4y ago

benjaminwootton 4y ago
These rate rises are starting to feel political in the UK and US. There’s an element of strongman signalling, regardless of damage, to make up for the earlier mistake of not responding early enough. The US markets are still well down, banks are failing, mortgages are extremely high. Stop dishing out the pain guys, at least until all of the previous rate rises have played through The system.
- the_mitsuhiko 4y ago
  > These rate rises are starting to feel political in the UK and US. They are deeply political. The interest rates would have to be significantly higher, particularly in the UK, but actually going there would do other damage. So they are trying to go as high as possible, without losing support of the businesses.
  - blitzar 4y ago
    If UK interest rates were at their non political, independant level (~ double their current level) - the survival of the UK as a going concern would be in jeopardy and the government would step in and make the rate setters a political no longer independent body. The governement already spends 80bn on the interest bill each year (against a budget of ~1,000bn); despite 20 years of being able to issue debt at effectively 0%.
    - darkerside 4y ago
      Is there such a natural level for interest rates?
      - blitzar 4y ago
        Yes, but its economic theory ... so no. https://en.wikipedia.org/wiki/Neutral_rate_of_interest https://en.wikipedia.org/wiki/Neutral_rate_of_interest (also known as r*) Naturally I have taken a few liberties with the theory - inflation +/- r* would be the correct rate for the economy. As a quick calculation, it wouldnt be unfair to say interest rate == inflation is a balanced monetary policy.
- tzhenghao 4y ago
  Oh yes, for sure! Speaking specifically about the US: Every POTUS (from both parties) during my lifetime has favored lower interest rates, cause jobs, "economy is strong" arguments - all means to look good during their term. The Fed is now stuck in a really hard place - raise too much too fast and you get many more SVBs going belly up, posing a larger systemic risk, assuming we even "make it out of the woods". Pause / raise slowly, and you risk inflation running red hot, and people who are technically employed, live paycheck to paycheck start to rely on food banks to cover the rapid raise in cost of living - a tax on everybody. The Fed is also fighting other dynamics like supply consequences of the Ukraine war, or energy crises, some of which are transitory, some are not. Still lots of uncertainty. All this on top of a tug of (policy) war between an administration that favors handing out more packages, and the Fed's duty in achieving pricing stability. Can't see this ending well.
  - lapcat 4y ago
    > Pause / raise slowly, and you risk inflation running red hot The federal funds rate is such a blunt instrument. It's not clear to me that raising the rate is particularly effective in stopping inflation, which tends to be a complex phenomenon with multiple causes. As you say, there are "other dynamics". > people who are technically employed, live paycheck to paycheck start to rely on food banks to cover the rapid raise in cost of living - a tax on everybody. On the other hand, there are also people who lose their paychecks entirely due to rising interest rates. The Fed has been very public about the fact that they want to stop wage inflation in particular (which tends to lag behind inflation of other goods). It's never been clear to me why it's a good idea to continually adjust the rate, as opposed to picking an ideal target rate and trying to keep it relatively stable permanently. It seems almost inevitable that the economy will go on a roller coaster with the fed turning the volume knob up and down. Chicken and egg problem, to mix my metaphors.
    - mholyland 4y ago
      > It's never been clear to me why it's a good idea to continually adjust the rate, as opposed to picking an ideal target rate and trying to keep it relatively stable permanently. That target rate depends on many things in the economy that the FED has no control over, so they adjust the knob as best they can predict, to stear the economy to their dual mandate. They need to keep inflation low (around 2%) and employment high, but they don't control what the government does in terms of raising/cutting taxes, what world events do to supply, and production. But you're right, it's a blunt knob to adjust when there are so many variables at play.
- Panzer04 4y ago
  Half the point of raising rates like this is to signal to everyone that inflation is a priority and will be addressed, with the hope of killing off expectations of further inflation (which can be a feedback loop). Ultimately none of the measures you mention are really relevant to inflation, as far as the Reserve would be concerned. CPI is. The US probably has it the worst because they subsidise fixed 30y mortgages, which you pretty much can't get anywhere else on the planet because the terms of such are so insanely generous to the holder. These insulate a massive portion of the US population from immediate effects of rate rises, so the US likely has to hit harder than most other countries for the same effect on inflation.
  - jacquesm 4y ago
    > they subsidise fixed 30y mortgages, which you pretty much can't get anywhere else on the planet https://www.rabobank.nl/particulieren/hypotheek/hypotheekrente https://www.rabobank.nl/particulieren/hypotheek/hypotheekren... 5.44% right now, still well below the US rates (~7%).
    - deleted 4y ago
      [deleted]
    - jdlshore 4y ago
      I can’t read that, but one of the unique features of the “standard” US 30-year fixed rate mortgage is that there’s no penalty for early payoff. As a result, it’s easy to refinance when rates go down, which is almost certain to occur during the 30-year period. This capability is priced in to the rate.
  - fomine3 4y ago
    Just introduce: "Flat 50" (フラット50) is a thing in Japan
- dageshi 4y ago
  The only way to really kill inflation is strongman signaling. The market has to believe you are willing to endure the pain and keep raising rates in order to kill inflation. And the mistake earlier was basically propping up the world economy during covid. I don't know exactly what else they could've done?
  - flandish 4y ago
    We could also stop sending so much to other nations currently at war, making them proxy wars for the US.
    - dageshi 4y ago
      You could, it wouldn't make a bit of difference to inflation in the US so I'm not sure why you would?
roenxi 4y ago
I reckon we're about to enter an exciting new experiment where they combine nominally high interest rates with large amounts of money printing. The banking system is already under a lot of stress, so I expect they're preparing to unleash hitherto-unprecedented amounts of largess on anyone who looks important and has a bank account. They don't have a lot of options at this point except word games where they explain it isn't a bailout, it is a Special Financial Operation. It isn't money printing, it is Quantitative Adjustments. This isn't central planning, this is just the only way grown men could imagine planning a financial system. The US isn't going to default, it'll just ... not pay back its debt in real terms and its creditors will be OK with that because what causes them worry is the word, not the fact their wealth just vanished.
- ImHereToVote 4y ago
  All this wordplay just goes to show how much power the people really have. Who else is this dog and pony show for? Democracy is still possible in the US.
- andirk 4y ago
  To be fair, it's not money printing. They just change a number on a computer at the Federal Reserve. We don't even get cash!!
senttoschool 4y ago
I imagine the Fed with its shoes on fire (inflation). On the one hand, it's holding a fire extinguisher (raising rates). On the other hand, it's a holding a gun ready to shoot its own feet (pausing rates to help banks). How much confidence do we have in the Fed? They failed to recognize earlier that printing so much would drastically increase inflation - even with all the data in the world.
- sokoloff 4y ago
  Did they fail to recognize it, or merely judge that that outcome was better than the alternative or that they could turn it down before the inflation got out of hand? It seems utterly obvious that a high level of money printing without a matching increase in supply of goods and services would eventually lead to a dramatic increase in inflation. It's less obvious exactly when that would start and when it would overshoot a comfortable range.
- vineyardmike 4y ago
  > On the one hand, it's holding a fire extinguisher (raising rates). There’s a lot of discourse that questions I’d rate increases are the most effective tool to tame inflation. It may be the only tool the Fed has, however. I’m confident the fed is aware of what its actions do, but they themselves admit they aren’t a political organization and the other parts of the government can made different decisions that have different consequences.
  - gerad 4y ago
    > it may be the only tool the Fed has Traditionally, raising taxes or cutting government spending was another way to limit the money supply - and hence curb inflation. The Fed is doing the best it can using monetary policy because the federal government is too fractured to have a cogent fiscal policy response. But fiscal tools probably would be useful to have in this environment. We’ll see what happens when the now higher interest rate debt payments that we’re using to fund federal spending come due. Consumers aren’t the only ones that have gotten used to easy credit and cheap borrowing over the last 20 years.
- 4y ago
someGuest12345 4y ago
I think it was some Canadian finance mister, who said some months ago (sorry no reference, it was in some economic forum panel some month(s) ago), my wording from memory: "We in West cannot control economy and inflation, what we can control is to go on with helping Ukraine, so we will do that." High inflation is maybe a sign that war is being lost.
- sokoloff 4y ago
  If he'd said "we cannot control the weather, what we can control is helping Ukraine", would a subsequent rainy weekend also maybe be a sign that the war is being lost?
- Panzer04 4y ago
  Sounds like a bit of a cop out. Governments certainly can control all of the above, but it means making significant adjustments to either spending or taxation, both of which tend to be unpopular changes. The war in Ukraine will turn into a rounding error as Russian gas is replaced by alternatives.
- MJsGlove 4y ago
  Our ministers are intellectually bankrupt and their statements should not be taken at face value. Read between the lines and hope to decipher what they really mean.
andirk 4y ago
To blame interest rates for banks failing is pretty ridiculous. These giant monsters were shitty with their/our money.
- lapcat 4y ago
  The Federal Reserve is supposed to supervise and regulate banks though. It clearly failed there. (As did Congress, of course. Plenty of governmental blame to go around.)
- systemvoltage 4y ago
  Educate yourself on why banks are failing, particularly points 3) and 4): https://news.ycombinator.com/item?id=35255993 https://news.ycombinator.com/item?id=35255993
  - andirk 4y ago
    I understand that even the safe bet is under water now, but that's a poor strategy to expect that for sure those bonds were safe. Is this true: any hike in interest rates since you bought the bond is usually bad? And they were bottomed out. Bunch of banks bought a bunch of super low interest bonds that can't even keep up with inflation. Cite: nothing
  - deleted 4y ago
    [deleted]
FreeHugs 4y ago
Increasing the interest rate is supposed to fight inflation. I often wonder if that really works. When the risk-free rate rises, doesn't that mean the opposite? That _more_ money will be printed? When the government says "You give me $100 and I'll give you back more later" - where is this "more" coming from? Isn't it just more debt that will be paid back with more printed money?
- pavlov 4y ago
  You can look at Turkey, which has chosen to fight inflation by lowering interest rates. Turkey’s president is an autocrat who can make this kind of decision unilaterally and his economic beliefs run counter to the mainstream, so it makes for a fascinating experiment. He’s been lowering rates for two years, from 18% to 8.5%. The results so far seem to support the economist orthodoxy: inflation in Turkey has ran up to 80% compared to a historical average of about 20% (which was roughly in line with the interest rate when Erdogan started his rate-decrease project.)
  - FreeHugs 4y ago
    But was it the lower interest rate that caused the inflation or the printing of money? Over what time did the inflation rate go up from 20% to 80% and by what percentage did the money supply change during that time?
    - pavlov 4y ago
      I'm certainly not any kind of expert on Turkey's economy. I'll just link to graphs that show the effects, someone smarter can debate the cause and effect. The rate cuts in Turkey began in September 2021: https://tradingeconomics.com/turkey/interest-rate https://tradingeconomics.com/turkey/interest-rate The inflation rate soared from 20% to over 80% soon afterwards: https://tradingeconomics.com/turkey/inflation-cpi https://tradingeconomics.com/turkey/inflation-cpi It's now stabilized to "only" 55% because of decreased energy price pressures, apparently. The M2 money supply in Turkish liras is climbing, but not in the same proportion as the rate cuts and inflation: https://tradingeconomics.com/turkey/money-supply-m2 https://tradingeconomics.com/turkey/money-supply-m2 Turkey has also been spending its foreign currency reserves to prop up the lira. They've experimented with extraordinary measures like a government guarantee to protect Turkish account holders against currency depreciation, in an effort to make people keep liras in banks rather than hard currency: https://www.kcl.ac.uk/news/supporting-the-turkish-lira-assessing-the-controversial-experiment-of-the-turkish-central-bank https://www.kcl.ac.uk/news/supporting-the-turkish-lira-asses... So Erdogan's Turkey is an interesting basket case all around — one for future economics textbooks maybe.
come_at_me_bro 4y ago
[dead]

50 points by andrekandre 4y ago

These rate rises are starting to feel political in the UK and US. There’s an element of strongman signalling, regardless of damage, to make up for the earlier mistake of not responding early enough. The US markets are still well down, banks are failing, mortgages are extremely high. Stop dishing out the pain guys, at least until all of the previous rate rises have played through The system.

the_mitsuhiko 4y ago
> These rate rises are starting to feel political in the UK and US. They are deeply political. The interest rates would have to be significantly higher, particularly in the UK, but actually going there would do other damage. So they are trying to go as high as possible, without losing support of the businesses.
- blitzar 4y ago
  If UK interest rates were at their non political, independant level (~ double their current level) - the survival of the UK as a going concern would be in jeopardy and the government would step in and make the rate setters a political no longer independent body. The governement already spends 80bn on the interest bill each year (against a budget of ~1,000bn); despite 20 years of being able to issue debt at effectively 0%.
  - darkerside 4y ago
    Is there such a natural level for interest rates?
    - blitzar 4y ago
      Yes, but its economic theory ... so no. https://en.wikipedia.org/wiki/Neutral_rate_of_interest https://en.wikipedia.org/wiki/Neutral_rate_of_interest (also known as r*) Naturally I have taken a few liberties with the theory - inflation +/- r* would be the correct rate for the economy. As a quick calculation, it wouldnt be unfair to say interest rate == inflation is a balanced monetary policy.
tzhenghao 4y ago
Oh yes, for sure! Speaking specifically about the US: Every POTUS (from both parties) during my lifetime has favored lower interest rates, cause jobs, "economy is strong" arguments - all means to look good during their term. The Fed is now stuck in a really hard place - raise too much too fast and you get many more SVBs going belly up, posing a larger systemic risk, assuming we even "make it out of the woods". Pause / raise slowly, and you risk inflation running red hot, and people who are technically employed, live paycheck to paycheck start to rely on food banks to cover the rapid raise in cost of living - a tax on everybody. The Fed is also fighting other dynamics like supply consequences of the Ukraine war, or energy crises, some of which are transitory, some are not. Still lots of uncertainty. All this on top of a tug of (policy) war between an administration that favors handing out more packages, and the Fed's duty in achieving pricing stability. Can't see this ending well.
- lapcat 4y ago
  > Pause / raise slowly, and you risk inflation running red hot The federal funds rate is such a blunt instrument. It's not clear to me that raising the rate is particularly effective in stopping inflation, which tends to be a complex phenomenon with multiple causes. As you say, there are "other dynamics". > people who are technically employed, live paycheck to paycheck start to rely on food banks to cover the rapid raise in cost of living - a tax on everybody. On the other hand, there are also people who lose their paychecks entirely due to rising interest rates. The Fed has been very public about the fact that they want to stop wage inflation in particular (which tends to lag behind inflation of other goods). It's never been clear to me why it's a good idea to continually adjust the rate, as opposed to picking an ideal target rate and trying to keep it relatively stable permanently. It seems almost inevitable that the economy will go on a roller coaster with the fed turning the volume knob up and down. Chicken and egg problem, to mix my metaphors.
  - mholyland 4y ago
    > It's never been clear to me why it's a good idea to continually adjust the rate, as opposed to picking an ideal target rate and trying to keep it relatively stable permanently. That target rate depends on many things in the economy that the FED has no control over, so they adjust the knob as best they can predict, to stear the economy to their dual mandate. They need to keep inflation low (around 2%) and employment high, but they don't control what the government does in terms of raising/cutting taxes, what world events do to supply, and production. But you're right, it's a blunt knob to adjust when there are so many variables at play.
Panzer04 4y ago
Half the point of raising rates like this is to signal to everyone that inflation is a priority and will be addressed, with the hope of killing off expectations of further inflation (which can be a feedback loop). Ultimately none of the measures you mention are really relevant to inflation, as far as the Reserve would be concerned. CPI is. The US probably has it the worst because they subsidise fixed 30y mortgages, which you pretty much can't get anywhere else on the planet because the terms of such are so insanely generous to the holder. These insulate a massive portion of the US population from immediate effects of rate rises, so the US likely has to hit harder than most other countries for the same effect on inflation.
- jacquesm 4y ago
  > they subsidise fixed 30y mortgages, which you pretty much can't get anywhere else on the planet https://www.rabobank.nl/particulieren/hypotheek/hypotheekrente https://www.rabobank.nl/particulieren/hypotheek/hypotheekren... 5.44% right now, still well below the US rates (~7%).
  - deleted 4y ago
    [deleted]
  - jdlshore 4y ago
    I can’t read that, but one of the unique features of the “standard” US 30-year fixed rate mortgage is that there’s no penalty for early payoff. As a result, it’s easy to refinance when rates go down, which is almost certain to occur during the 30-year period. This capability is priced in to the rate.
- fomine3 4y ago
  Just introduce: "Flat 50" (フラット50) is a thing in Japan
dageshi 4y ago
The only way to really kill inflation is strongman signaling. The market has to believe you are willing to endure the pain and keep raising rates in order to kill inflation. And the mistake earlier was basically propping up the world economy during covid. I don't know exactly what else they could've done?
- flandish 4y ago
  We could also stop sending so much to other nations currently at war, making them proxy wars for the US.
  - dageshi 4y ago
    You could, it wouldn't make a bit of difference to inflation in the US so I'm not sure why you would?

roenxi 4y ago

I reckon we're about to enter an exciting new experiment where they combine nominally high interest rates with large amounts of money printing. The banking system is already under a lot of stress, so I expect they're preparing to unleash hitherto-unprecedented amounts of largess on anyone who looks important and has a bank account. They don't have a lot of options at this point except word games where they explain it isn't a bailout, it is a Special Financial Operation. It isn't money printing, it is Quantitative Adjustments. This isn't central planning, this is just the only way grown men could imagine planning a financial system. The US isn't going to default, it'll just ... not pay back its debt in real terms and its creditors will be OK with that because what causes them worry is the word, not the fact their wealth just vanished.

ImHereToVote 4y ago
All this wordplay just goes to show how much power the people really have. Who else is this dog and pony show for? Democracy is still possible in the US.
andirk 4y ago
To be fair, it's not money printing. They just change a number on a computer at the Federal Reserve. We don't even get cash!!

senttoschool 4y ago

I imagine the Fed with its shoes on fire (inflation). On the one hand, it's holding a fire extinguisher (raising rates). On the other hand, it's a holding a gun ready to shoot its own feet (pausing rates to help banks). How much confidence do we have in the Fed? They failed to recognize earlier that printing so much would drastically increase inflation - even with all the data in the world.

sokoloff 4y ago
Did they fail to recognize it, or merely judge that that outcome was better than the alternative or that they could turn it down before the inflation got out of hand? It seems utterly obvious that a high level of money printing without a matching increase in supply of goods and services would eventually lead to a dramatic increase in inflation. It's less obvious exactly when that would start and when it would overshoot a comfortable range.
vineyardmike 4y ago
> On the one hand, it's holding a fire extinguisher (raising rates). There’s a lot of discourse that questions I’d rate increases are the most effective tool to tame inflation. It may be the only tool the Fed has, however. I’m confident the fed is aware of what its actions do, but they themselves admit they aren’t a political organization and the other parts of the government can made different decisions that have different consequences.
- gerad 4y ago
  > it may be the only tool the Fed has Traditionally, raising taxes or cutting government spending was another way to limit the money supply - and hence curb inflation. The Fed is doing the best it can using monetary policy because the federal government is too fractured to have a cogent fiscal policy response. But fiscal tools probably would be useful to have in this environment. We’ll see what happens when the now higher interest rate debt payments that we’re using to fund federal spending come due. Consumers aren’t the only ones that have gotten used to easy credit and cheap borrowing over the last 20 years.
4y ago

someGuest12345 4y ago

I think it was some Canadian finance mister, who said some months ago (sorry no reference, it was in some economic forum panel some month(s) ago), my wording from memory: "We in West cannot control economy and inflation, what we can control is to go on with helping Ukraine, so we will do that." High inflation is maybe a sign that war is being lost.

sokoloff 4y ago
If he'd said "we cannot control the weather, what we can control is helping Ukraine", would a subsequent rainy weekend also maybe be a sign that the war is being lost?
Panzer04 4y ago
Sounds like a bit of a cop out. Governments certainly can control all of the above, but it means making significant adjustments to either spending or taxation, both of which tend to be unpopular changes. The war in Ukraine will turn into a rounding error as Russian gas is replaced by alternatives.
MJsGlove 4y ago
Our ministers are intellectually bankrupt and their statements should not be taken at face value. Read between the lines and hope to decipher what they really mean.

andirk 4y ago

To blame interest rates for banks failing is pretty ridiculous. These giant monsters were shitty with their/our money.

lapcat 4y ago
The Federal Reserve is supposed to supervise and regulate banks though. It clearly failed there. (As did Congress, of course. Plenty of governmental blame to go around.)
systemvoltage 4y ago
Educate yourself on why banks are failing, particularly points 3) and 4): https://news.ycombinator.com/item?id=35255993 https://news.ycombinator.com/item?id=35255993
- andirk 4y ago
  I understand that even the safe bet is under water now, but that's a poor strategy to expect that for sure those bonds were safe. Is this true: any hike in interest rates since you bought the bond is usually bad? And they were bottomed out. Bunch of banks bought a bunch of super low interest bonds that can't even keep up with inflation. Cite: nothing
- deleted 4y ago
  [deleted]

FreeHugs 4y ago

Increasing the interest rate is supposed to fight inflation. I often wonder if that really works. When the risk-free rate rises, doesn't that mean the opposite? That _more_ money will be printed? When the government says "You give me $100 and I'll give you back more later" - where is this "more" coming from? Isn't it just more debt that will be paid back with more printed money?

pavlov 4y ago
You can look at Turkey, which has chosen to fight inflation by lowering interest rates. Turkey’s president is an autocrat who can make this kind of decision unilaterally and his economic beliefs run counter to the mainstream, so it makes for a fascinating experiment. He’s been lowering rates for two years, from 18% to 8.5%. The results so far seem to support the economist orthodoxy: inflation in Turkey has ran up to 80% compared to a historical average of about 20% (which was roughly in line with the interest rate when Erdogan started his rate-decrease project.)
- FreeHugs 4y ago
  But was it the lower interest rate that caused the inflation or the printing of money? Over what time did the inflation rate go up from 20% to 80% and by what percentage did the money supply change during that time?
  - pavlov 4y ago
    I'm certainly not any kind of expert on Turkey's economy. I'll just link to graphs that show the effects, someone smarter can debate the cause and effect. The rate cuts in Turkey began in September 2021: https://tradingeconomics.com/turkey/interest-rate https://tradingeconomics.com/turkey/interest-rate The inflation rate soared from 20% to over 80% soon afterwards: https://tradingeconomics.com/turkey/inflation-cpi https://tradingeconomics.com/turkey/inflation-cpi It's now stabilized to "only" 55% because of decreased energy price pressures, apparently. The M2 money supply in Turkish liras is climbing, but not in the same proportion as the rate cuts and inflation: https://tradingeconomics.com/turkey/money-supply-m2 https://tradingeconomics.com/turkey/money-supply-m2 Turkey has also been spending its foreign currency reserves to prop up the lira. They've experimented with extraordinary measures like a government guarantee to protect Turkish account holders against currency depreciation, in an effort to make people keep liras in banks rather than hard currency: https://www.kcl.ac.uk/news/supporting-the-turkish-lira-assessing-the-controversial-experiment-of-the-turkish-central-bank https://www.kcl.ac.uk/news/supporting-the-turkish-lira-asses... So Erdogan's Turkey is an interesting basket case all around — one for future economics textbooks maybe.

come_at_me_bro 4y ago

[dead]