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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

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?

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?