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The flaw I see is centered around this paragraph. > How can rates come down? The present uncertainty around tariffs and a potential crisis could create conditi

• timr 2y ago
  Prices rising due to tariffs isn't "inflation" in any traditional sense. It's not driven by consumer demand, and therefore the logic for raising rates (i.e. slowing economic growth by reducing money in the market) doesn't apply.
  • sandworm101 2y ago
    >> rising due to tariffs isn't "inflation" in any traditional sense. Perhaps not in an academic sense, but the vast majority of people understand inflation as a rise in the cost of living, no matter the root cause.
    • rayiner 2y ago
      Yes, but the point being made above is about the reaction of the bond market vis a vis refinancing the debt, not consumers.
      • mattnewton 2y ago
        You can’t isolate these things, the Fed’s charter is to try and reduce inflation for consumers not regulate the bond market for the US debt, but their interest rates and repo actions move the bond market.
  • ethbr1 2y ago
    Coupled with tax cuts?
  • tananaev 2y ago
    It doesn't matter what the root cause of increasing prices is. Fed doesn't have any other levers but to adjust rates up to reduce demand. It will work either way because even if demand is not the source, it will reduce whatever demand that was there.
  • scottiebarnes 2y ago
    If the consumer price index, which is a metric the Fed uses, goes up, then inflation has gone up. Every dollar buys you less (less purchasing power), and the nominal price has increased. To me this indicates inflation. Of course, you need to calculate how this balances out in terms of jobs/wages and the flow of investment, but that's really hard to figure out at this point in time. I'd expect the CPI to go up in the event of global tariffs at a baseline of 10% assuming all things go ahead as described.
    • timr 2y ago
      Yes, that's fine. But if the acute cause is not consumer demand, raising interest rates won't do anything. (Note: a sibling comment suggests that it "doesn't matter", because if you slow the economy enough, you'll offset the artificial "inflation" due to tariffs. Maybe so. But that would be cutting off your arm to treat a paper cut.)
      • adgjlsfhk1 2y ago
        calling 50% tarrifs on all of easy Asia is hardly a paper cut. it's more breaking someone's ribs while giving them CPR
        • SpaceNoodled 2y ago
          It's more like breaking your own ribs while breaking someone else's ribs, no CPR involved.
          • TeMPOraL 2y ago
            It gets extra confusing when considering import/export of ribs.
      • resters 2y ago
        Inflation is just a description of price movement, nothing more.
      • patates 2y ago
  • greybox 2y ago
    If a pair of shoes today costs $30, and a pair of shoes tomorrow costs $60 (not saying this will happen, just positing a scenario), from a consumer perspective, there has been 100% inflation in the price of shoes. It doesn't matter that the price increase is due to tarrifs on imports from Vietnam.
    • FredPret 2y ago
      Yes and there will be the usual political consequences associated with inflation; but this type of inflation is caused by a tax and cannot be combated by raising interest rates.
      • sroussey 2y ago
        It most certainly can, though you would have to push interest rates much higher than normal to kill demand enough to have an effect.
      • SpaceManNabs 2y ago
        This is blatantly false. You just have to look at Jerome Powell's reasoning in 2018-2019 and just last month!
      • ElevenLathe 2y ago
        Why wouldn't a rate hike make a difference? It will lower demand and therefore prices, no? I mean, this isn't really something that we should celebrate or want, since it essentially just means discouraging people from buying shoes because they can't afford it, but it does bring the prices down (or at least slow the rate of shoe price increase).
        • FredPret 2y ago
          True but that mechanism is indirect at best. Usually high interest rates discourages more borrowing and lowers spending that way. But in this case the price increase is already due to the government putting its thumb on the scale. The best way to reduce the price is not via the Rube Goldberg interest rate mechanism to shrink spending and thus demand for the $60 shoe, but by removing the tariff and make it a $30 shoe immediately.
  • scotty79 2y ago
    It doesn't matter what causes inflation. It's always a sign that there's more money than is needed for current and anticipated levels of economic activity. And the correct course of action is always to raise the rates to reduce the pace that the money is printed at. At least if you care about avoiding hyperinflation.
  • pragmatic 2y ago
    That's a distinction without a difference. Oil price shocks in the 70s caused stagflation, a very real threat now. The solution then was massive pain (Volker) that seemed to slay the beast.
  • Spooky23 2y ago
    Inflation is inflation. The fact that we decided allow a massive tax increase by executive fiat is irrelevant. The fact that we’re risking a death spiral from decreased consumer demand via government imposed inflation is irrelevant. You’re right in that the usual formula of turning the knobs on interest rates to ease economic challenges is unlikely to work. We may have to turn the knobs to prevent a total death spiral, however. Get ready for 16% mortgages.
  • cco 2y ago
    Didn't stop the Fed last time, when inflation was due to market control letting companies pick their own price (also not "real" inflation).
  • croemer 2y ago
    Actually, price increases caused by tariffs are a type of inflation—specifically, cost-push inflation. This is consistent with standard definitions found in macroeconomics and international economics textbooks.
  • dragonwriter 2y ago
    > Prices rising due to tariffs isn't "inflation" in any traditional sense. Yes, consumer prices rising is inflation in the traditional sense (since, unqualified, “inflation” refers to increases in consumer prices.) > It's not driven by consumer demand, Inflation is not restricted to demand-pull inflation, which is why the term “demand-pull inflation” has a reason to exist. Tariff-driven price increases are a form of cost-push inflation. > and therefore the logic for raising rates (i.e. slowing economic growth by reducing money in the market) doesn't apply. The existence of cost-push inflation doesn't change the short-term marginal effects of monetary policy on prices, so of you care just about near-term price levels, the same monetary interventions make sense as for demand-pull inflation. OTOH, beyond short-term price effects things are very different: demand-pull inflation frequently is a symptom of strong economic growth and cooling the economy can still be consistent with acceptable growth. Cost-push inflation tends to be an effect of forces outside of monetary policy which tend to slow the economy, so throwing tight money policy on top of it accelerates the slowdown. This is particularly bad if you are already in a recession with cost-push inflation (stagflation). The good thing, such as it is, about cost-push inflation where the cost driver is a clear policy like tariffs, is that while monetary policy has no good option to fix it, there is a very clear policy solution—stop the policy that is driving the problem. The problem is when there is irrational attachment to that policy in the current government.
    • timr 2y ago
      You're just using new terms ("cost-push inflation") to disagree without actually disagreeing. > so of you care just about near-term price levels, the same monetary interventions make sense as for demand-pull inflation....Cost-push inflation tends to be an effect of forces outside of monetary policy which tend to slow the economy, so throwing tight money policy on top of it accelerates the slowdown. This is particularly bad if you are already in a recession with cost-push inflation (stagflation). Again, you're just saying the same thing that I wrote above, but arguing (?) that it's actually called "inflation". If your point is that tariffs are bad, fine. We both agree that what you call "cost-push inflation" is not something you'd rationally raise interest rates to counter.
      • 2y ago
  • Zamaamiro 2y ago
    There's nothing in the definition of inflation that says it needs to be driven by consumer demand.
  • EasyMark 2y ago
    Inflation is definitely going to happen due to tariffs. If I'm paying 20% more next year on average for products above what I'm currently paying that is 20% inflation for me, that is what people will see; they don't care about your purist form of inflation arguments. They also vote against people who cause inflation, especially when they promised the opposite.
• jiocrag 2y ago
  This is flat out wrong. The Fed raises and lowers interest rates to stimulate or tamp down demand. Raising interest rates because prices rise while demand drops due to a trade war would accomplish nothing.
  • frontfor 2y ago
    The Fed has two mandates: maximum employment & stable prices. If prices go up, the Fed is mandated to raise interest rate.
    • projektfu 2y ago
      The Fed has a mandate to keep inflation under control but a lot of leeway to decide if they should increase interest rates or not. If they see a price increase as temporary or structural, and not based on an interest-rate-responsive process, they will not increase rates. Some prices are "sticky", some are definitely not.
    • Marsymars 2y ago
      They're mandated to raise interest rates in the event of structural inflation, not in the event of a one-time increase in prices. It would be silly if the government increasing the VAT required the fed to increase interest rates.
      • beams_of_light 2y ago
        That's an odd, fundamentally disconnected mechanism that, I think, would have devastating impacts for Main St.
        • no_wizard 2y ago
          and it does, and has for many decades. This dual mandate makes little sense in practice
          • dragonwriter 2y ago
• TaurenHunter 2y ago
  Perhaps, we are mixing 2 things: 1) Economic/Monetary Inflation, which is an increase in the money supply in an economy driven by government or central bank ("print money"). 2) Price Inflation, which is an increase in the general price level of goods and services that people typically notice at the groceries or gas and usually derives from monetary inflation, but can also be due to the new tariffs. Is the Fed going to do the same confusion and use 2 to justify higher rates for longer? I think they shouldn't unless they're being disingenuous and politically motivated (push just enough to make the entire Trump mandate an unending crisis until Democrats get back in power).
  • arrosenberg 2y ago
    > I think they shouldn't unless they're being disingenuous and politically motivated (push just enough to make the entire Trump mandate an unending crisis until Democrats get back in power). They've been saying since the Biden administration they are going to keep raising rates. If the Trump regime's choices drive us into an unending crisis, bailing him out with rate cuts would be the politically motivated choice. Continuing to raise rates is just sticking to principles.
    • TaurenHunter 2y ago
      Not true. The Fed did lower rates leading up to the election, seemingly to postpone a crisis until Democrats got elected (which didn't happen). https://www.reuters.com/markets/us/federal-reserve-expected-cut-rates-lift-bidens-prospects-2024-03-25/ https://www.reuters.com/markets/us/federal-reserve-expected-...
      • arrosenberg 2y ago
        That’s a speculative article that was wrong. I was also somewhat misremembering JPow saying he wouldn’t cut rates after the inauguration as him saying he was going to raise them. Rates changed a small amount in September, then they did two big cuts after the election. Not really evidence of political bias in any case.
      • 2y ago
• megaman821 2y ago
  Since people won't actually have more money to spend, you would expect it to lower the prices of other things like housing or travel. So there should be a negligible impact on inflation depending on the weighting.
• rdsubhas 2y ago
  The logic is very reductive. It's like: "the Fed's job is to cut a snake, so if they see a snake around their head they'll just close their eyes and cut both". Raising rates does Absolutely Nothing to undo the tariffs or bringing the price down. Fed is not a blind machine.
• justonceokay 2y ago
  +1. In my relatively uninformed opinion what trump is doing is accelerating a kind of global arbitration in which the US is no longer the dominant economic power. We are going to have to share our toys. The “3rd world” is developing and it isn’t as easy to bully the globe into doing all our dirty work. In my imagination, 50 years from now we will have a quality of life more similar to Central Europe: fine, but nothing special. Most people will live much more simply, rent smaller spaces, drive less ostentatious cars that they share. People will live with their families out of necessity and strawberries won’t be available in December.
• TaurenHunter 2y ago
  The Fed may raise interest rates, that is, proposing that securities be sold at a higher discount. A fearful market may end up bidding up these securities anyway, bring the effective rate down.