3 ms·

Central Bank interest rate setting has a long lag time. You need to turn the wheel 12-18 months before the car turns.

by A_Duck 1y ago

matwood 1y ago
Sure, which is why they were already on track to cut again as inflation was coming down. That was until Trump through his tariff grenade into the mix causing the fed to take on a wait and see approach.
mothballed 1y ago
I'm curious, if we eliminated the central bank and let interest rates float with private banks, would it have a similar lag time? Seems like it might let the market adjust faster and match supply and demand for loans better.
- altairprime 1y ago
  If it behaves like gas prices, then they will travel one direction instantaneously and the other direction only after months of profit are accrued. Generally most markets selling tangible goods shift prices rapidly only to the benefit of sellers; one can expect interest rates to behave accordingly.
- jfengel 1y ago
  The Fed's job is to act counter to the trends. As the saying goes, their job is to take away the punch bowl just as the party gets going. Their goal is to keep the economy steady, rather than maximally responsive. Their mandate is for a stable business environment, and incidentally stable employment. They were established to counter the boom-and-bust cycle we saw throughout the 19th century, with bank panics every few years.
  - mothballed 1y ago
    Looks like they've been doing a bad job. They've created a pretty massive destabilization bust of the dollar, with a massive unrecovered crash since the inception of the fed [0]. Not long after the fed's inception, there was massive GDP destabilization[1], and then further boom-and-bust cycles. Unemployment cycles circa before/after fed don't look terribly different either, especially if you exclude war time. In fact there was a pretty terrible boom-bust cycle about 20 years after the fed's inception. [2] Which all does have me double checking all of this. We're getting long lag times, one giant bank bust in slow motion except distributed across all of us with USD going to zero, and even after the fed was created an awful great depression which some economists have theorized the fed even made worse. Moving back to the response time -- it was a genuine question. I have no idea. Maybe the fed speeds up response by having an endless ability to quantitatively ease. Or maybe it acts like a big flywheel. [0] https://www.oftwominds.com/photos2012/Dollar-value1776-2008a.gif https://www.oftwominds.com/photos2012/Dollar-value1776-2008a... [1]. http://visualeconsite.s3.amazonaws.com/wp-content/uploads/RealGDPperCapita-650x450.png http://visualeconsite.s3.amazonaws.com/wp-content/uploads/Re... [2] https://upload.wikimedia.org/wikipedia/commons/9/9c/US_Unemployment_1890-2009.gif https://upload.wikimedia.org/wikipedia/commons/9/9c/US_Unemp...
    - throw0101c 1y ago
      > Looks like they've been doing a bad job. Historically the last few decades have been the most stable in recorded history: * https://en.wikipedia.org/wiki/Great_Moderation https://en.wikipedia.org/wiki/Great_Moderation * https://en.wikipedia.org/wiki/Recession#United_States https://en.wikipedia.org/wiki/Recession#United_States * https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States https://en.wikipedia.org/wiki/List_of_recessions_in_the_Unit... > They've created a pretty massive destabilization bust of the dollar, with a massive unrecovered crash since the inception of the fed [0]. The "bust of the dollar" is a valid critique if you keep your dollars literally under your mattress or literally buried in the ground. As Nick Maggiulli observed in 2022: > Hot take: This is a good thing. > No currency should be able to buy the same basket of goods over very long timespans through hoarding. If you want to retain the purchasing power of your money, it should participate in society via investment. * https://twitter.com/dollarsanddata/status/1592651809750798336 https://twitter.com/dollarsanddata/status/159265180975079833... A follow-on from Barry Ritzholtz: > Nick is right: Cash is a medium of exchange, not a store of value. > Leave assets in dollars since 1913, your investing incompetency cost your estate/foundation a 99% loss. Invest cash in stocks, real estate, or other risk assets + your returns are up more than 10,000%. * https://twitter.com/Ritholtz/status/1593227389156622336#m https://twitter.com/Ritholtz/status/1593227389156622336#m Just putting your money into T-Bills would have kept up with inflation.

Central Bank interest rate setting has a long lag time. You need to turn the wheel 12-18 months before the car turns.

by A_Duck 1y ago

Central Bank interest rate setting has a long lag time. You need to turn the wheel 12-18 months before the car turns.

Sure, which is why they were already on track to cut again as inflation was coming down. That was until Trump through his tariff grenade into the mix causing the fed to take on a wait and see approach.

mothballed 1y ago

I'm curious, if we eliminated the central bank and let interest rates float with private banks, would it have a similar lag time? Seems like it might let the market adjust faster and match supply and demand for loans better.

altairprime 1y ago
If it behaves like gas prices, then they will travel one direction instantaneously and the other direction only after months of profit are accrued. Generally most markets selling tangible goods shift prices rapidly only to the benefit of sellers; one can expect interest rates to behave accordingly.
jfengel 1y ago
The Fed's job is to act counter to the trends. As the saying goes, their job is to take away the punch bowl just as the party gets going. Their goal is to keep the economy steady, rather than maximally responsive. Their mandate is for a stable business environment, and incidentally stable employment. They were established to counter the boom-and-bust cycle we saw throughout the 19th century, with bank panics every few years.
- mothballed 1y ago
  Looks like they've been doing a bad job. They've created a pretty massive destabilization bust of the dollar, with a massive unrecovered crash since the inception of the fed [0]. Not long after the fed's inception, there was massive GDP destabilization[1], and then further boom-and-bust cycles. Unemployment cycles circa before/after fed don't look terribly different either, especially if you exclude war time. In fact there was a pretty terrible boom-bust cycle about 20 years after the fed's inception. [2] Which all does have me double checking all of this. We're getting long lag times, one giant bank bust in slow motion except distributed across all of us with USD going to zero, and even after the fed was created an awful great depression which some economists have theorized the fed even made worse. Moving back to the response time -- it was a genuine question. I have no idea. Maybe the fed speeds up response by having an endless ability to quantitatively ease. Or maybe it acts like a big flywheel. [0] https://www.oftwominds.com/photos2012/Dollar-value1776-2008a.gif https://www.oftwominds.com/photos2012/Dollar-value1776-2008a... [1]. http://visualeconsite.s3.amazonaws.com/wp-content/uploads/RealGDPperCapita-650x450.png http://visualeconsite.s3.amazonaws.com/wp-content/uploads/Re... [2] https://upload.wikimedia.org/wikipedia/commons/9/9c/US_Unemployment_1890-2009.gif https://upload.wikimedia.org/wikipedia/commons/9/9c/US_Unemp...
  - throw0101c 1y ago
    > Looks like they've been doing a bad job. Historically the last few decades have been the most stable in recorded history: * https://en.wikipedia.org/wiki/Great_Moderation https://en.wikipedia.org/wiki/Great_Moderation * https://en.wikipedia.org/wiki/Recession#United_States https://en.wikipedia.org/wiki/Recession#United_States * https://en.wikipedia.org/wiki/List_of_recessions_in_the_United_States https://en.wikipedia.org/wiki/List_of_recessions_in_the_Unit... > They've created a pretty massive destabilization bust of the dollar, with a massive unrecovered crash since the inception of the fed [0]. The "bust of the dollar" is a valid critique if you keep your dollars literally under your mattress or literally buried in the ground. As Nick Maggiulli observed in 2022: > Hot take: This is a good thing. > No currency should be able to buy the same basket of goods over very long timespans through hoarding. If you want to retain the purchasing power of your money, it should participate in society via investment. * https://twitter.com/dollarsanddata/status/1592651809750798336 https://twitter.com/dollarsanddata/status/159265180975079833... A follow-on from Barry Ritzholtz: > Nick is right: Cash is a medium of exchange, not a store of value. > Leave assets in dollars since 1913, your investing incompetency cost your estate/foundation a 99% loss. Invest cash in stocks, real estate, or other risk assets + your returns are up more than 10,000%. * https://twitter.com/Ritholtz/status/1593227389156622336#m https://twitter.com/Ritholtz/status/1593227389156622336#m Just putting your money into T-Bills would have kept up with inflation.