6 ms·

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

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.
sz4kerto 4y ago
> They failed to recognize earlier that printing so much would drastically increase inflation There isn't yet a complete consensus on what exactly contributed to the inflation and to what extent. Many argue that supply-side shocks contributed more than demand-side.
- spaceman_2020 4y ago
  You seriously can't look at the massive asset bubble all that increased money supply created and blame it all on supply-side. Housing went up 50-100% within a year. Crypto popped to $3T+. S&P popped 100%. All of this was led by demand side. There was no supply-side problem of Dogecoin or equities. It's not unreasonable to expect that some of this also bled out to commodities and consumer goods.
  - mjevans 4y ago
    What can the 'Fed' (reserve) do to fix the supply side? That requires good legislation and follow through on civic planning. We can't even get DST or NO-DST to pass even though stopping the time shift ride somewhere, for some even anywhere, seems like a no-brainer piece of legislation.
  - lesuorac 4y ago
    There's long been a supply side issue with housing. It's also sold at the margin so if demand keeps increasing by say 5k people/yr and supply increases at 3k people/yr then prices go up way beyond 5/3. Awfully weird for this inflation to be demand side when people got a ton of money (and spent it) and things didn't cost more and then _years_ later it did ... Like I could say inflation is going to occur people Biden ate a sandwich today and as long as it happens within the next 3 years I can just claim success?
throw0101b 4y ago
> that printing so much Please stop with this. It was not the Fed's actions that caused a high CPI. They did the exact same thing post-GFC and nothing happened despite much tearing of garments: > We believe the Federal Reserve's large-scale asset purchase plan (so-called "quantitative easing") should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment. * https://economics21.org/html/open-letter-ben-bernanke-287.html https://economics21.org/html/open-letter-ben-bernanke-287.ht... The difference this time was a huge geopolitical event which drove up prices (a huge driver of the CPI was energy prices: remember the GOP going on and on about gas prices?), a lot of COVID assistance, post-COVID stimulus, and supply chain issues: > Inflation has remained at levels well above the Federal Reserve’s inflation goal of 2% for over a year. Separating the underlying data from the personal consumption expenditures price index into supply- versus demand-driven categories reveals that supply factors explain about half of the run-up in current inflation levels. Demand factors are responsible for about one-third, with the remainder resulting from ambiguous factors. While supply disruptions are widely expected to ease this year, this outcome is highly uncertain. * https://www.frbsf.org/economic-research/publications/economic-letter/2022/june/how-much-do-supply-and-demand-drive-inflation/ https://www.frbsf.org/economic-research/publications/economi... The COVID measure were one-shot deals and were, in fact, predicted to raise inflation for a short (1-2 year) period, analogously to sudden Korean War spending (versus the continued spending for Vietnam): * https://www.piie.com/blogs/realtime-economic-issues-watch/inflation-fears-and-biden-stimulus-look-korean-war-not-vietnam https://www.piie.com/blogs/realtime-economic-issues-watch/in... The main thing they failed to predict was the invasion of Ukraine, which added to the other three conditions. Sure; perhaps the Fed could have started tightening sooner. But what is the counter-factual of the last 2-3 years? No COVID assistance measure so people have no money when things were on lockdown? No help in getting the economy started post-COVID? What would have the (un)employment rate been? Does anyone remember the long post-GFC slog to get everyone back to work (because the GOP wouldn't give Obama proper stimulus dollars)?

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.

sz4kerto 4y ago

> They failed to recognize earlier that printing so much would drastically increase inflation There isn't yet a complete consensus on what exactly contributed to the inflation and to what extent. Many argue that supply-side shocks contributed more than demand-side.

spaceman_2020 4y ago
You seriously can't look at the massive asset bubble all that increased money supply created and blame it all on supply-side. Housing went up 50-100% within a year. Crypto popped to $3T+. S&P popped 100%. All of this was led by demand side. There was no supply-side problem of Dogecoin or equities. It's not unreasonable to expect that some of this also bled out to commodities and consumer goods.
- mjevans 4y ago
  What can the 'Fed' (reserve) do to fix the supply side? That requires good legislation and follow through on civic planning. We can't even get DST or NO-DST to pass even though stopping the time shift ride somewhere, for some even anywhere, seems like a no-brainer piece of legislation.
- lesuorac 4y ago
  There's long been a supply side issue with housing. It's also sold at the margin so if demand keeps increasing by say 5k people/yr and supply increases at 3k people/yr then prices go up way beyond 5/3. Awfully weird for this inflation to be demand side when people got a ton of money (and spent it) and things didn't cost more and then _years_ later it did ... Like I could say inflation is going to occur people Biden ate a sandwich today and as long as it happens within the next 3 years I can just claim success?

throw0101b 4y ago

> that printing so much Please stop with this. It was not the Fed's actions that caused a high CPI. They did the exact same thing post-GFC and nothing happened despite much tearing of garments: > We believe the Federal Reserve's large-scale asset purchase plan (so-called "quantitative easing") should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment. * https://economics21.org/html/open-letter-ben-bernanke-287.html https://economics21.org/html/open-letter-ben-bernanke-287.ht... The difference this time was a huge geopolitical event which drove up prices (a huge driver of the CPI was energy prices: remember the GOP going on and on about gas prices?), a lot of COVID assistance, post-COVID stimulus, and supply chain issues: > Inflation has remained at levels well above the Federal Reserve’s inflation goal of 2% for over a year. Separating the underlying data from the personal consumption expenditures price index into supply- versus demand-driven categories reveals that supply factors explain about half of the run-up in current inflation levels. Demand factors are responsible for about one-third, with the remainder resulting from ambiguous factors. While supply disruptions are widely expected to ease this year, this outcome is highly uncertain. * https://www.frbsf.org/economic-research/publications/economic-letter/2022/june/how-much-do-supply-and-demand-drive-inflation/ https://www.frbsf.org/economic-research/publications/economi... The COVID measure were one-shot deals and were, in fact, predicted to raise inflation for a short (1-2 year) period, analogously to sudden Korean War spending (versus the continued spending for Vietnam): * https://www.piie.com/blogs/realtime-economic-issues-watch/inflation-fears-and-biden-stimulus-look-korean-war-not-vietnam https://www.piie.com/blogs/realtime-economic-issues-watch/in... The main thing they failed to predict was the invasion of Ukraine, which added to the other three conditions. Sure; perhaps the Fed could have started tightening sooner. But what is the counter-factual of the last 2-3 years? No COVID assistance measure so people have no money when things were on lockdown? No help in getting the economy started post-COVID? What would have the (un)employment rate been? Does anyone remember the long post-GFC slog to get everyone back to work (because the GOP wouldn't give Obama proper stimulus dollars)?