Federal Reserve to increase interest rates by 75 basis points for the third time(federalreserve.gov)
federalreserve.gov
Federal Reserve to increase interest rates by 75 basis points for the third time
https://www.federalreserve.gov/newsevents/pressreleases/monetary20220921a.htm
235 comments
I'll echo what some folks have said in other threads, we've had rates down near zero for fifteen years, and we've got to get them back somewhere near historic normals at some point. If only so they can be cut again during the next crisis. How much is our entire culture the result of cheap money?
I'll mention something that most people are forgetting. The Fed was forced to cut rates to zero for a long time because fiscal policy was not stimulative enough.
Rates are a shitty stimulative tool. Here's Bernanke in 2012:
https://www.theatlantic.com/business/archive/2012/12/ben-ber...
Low rates help people with money borrow more cheaply, accrue more wealth, and kick bankruptcy cans down the road indefinitely. It also royally screws over your average saver and pension fund who's forced to take on more and more risk for any sort of meaningful return.
Rates are a shitty stimulative tool. Here's Bernanke in 2012:
https://www.theatlantic.com/business/archive/2012/12/ben-ber...
Low rates help people with money borrow more cheaply, accrue more wealth, and kick bankruptcy cans down the road indefinitely. It also royally screws over your average saver and pension fund who's forced to take on more and more risk for any sort of meaningful return.
> The Fed was forced to cut rates to zero for a long time because fiscal policy was not stimulative enough.
It's not just fiscal stimulus but "how" the stimulus was applied.
It's not like the government isn't spending enough. It is spending. Until recently, all the spending went on tax credits and military.
What we need is fiscal stimulus in industries of the future. Only the current administration gets it and made it happen with the recent bill to support new energy transition.
We need more fiscal stimulus in cheap production of pills, medical practitioners, hospitals, daycare services and housing. Literally just give incentives to produce more units of these.
It's not just fiscal stimulus but "how" the stimulus was applied.
It's not like the government isn't spending enough. It is spending. Until recently, all the spending went on tax credits and military.
What we need is fiscal stimulus in industries of the future. Only the current administration gets it and made it happen with the recent bill to support new energy transition.
We need more fiscal stimulus in cheap production of pills, medical practitioners, hospitals, daycare services and housing. Literally just give incentives to produce more units of these.
I'm the parent commenter, and I strongly disagree with the idea that stimulus should be directed by the federal government.
The federal government is an extremely poor resource allocator. It knows nothing about local and personal wants and needs. In my view, funding should be dolled out to individuals and maybe local governments. That way money flows from the bottom up, not top down.
The money flow is an extremely important factor: when money flows to individuals, each individual gains "votes" to allocate resources. Those votes informs how and where the economy grows at a granular level. The federal government cannot do this with any level of precision or efficiency.
If higher levels of government need money to do things, they should tax for--this includes some portion of the transfer payments. I know it sounds redundant for the government to tax money they've handed out, but I think governments need to feel the pain of working to get the money in the first place.
I'm also convinced you would dramatically reduce the amount of fraud and favoritism that occurs since decision making will end up being decentralized.
Here's a "hot take" example. The federal government funding child care is a dumb idea.
1) Not everyone needs child care.
2) Not everyone needs child care in the way the federal government wants to provide it.
3) An entire bureaucratic apparatus needs to be developed to define what child care is, what constitutes valid child care, who can provide child care, blah, blah, blah. This will be expensive to manage and will metasticize in its own way over time.
So why not just give people money to people who have young children to do whatever they want to do with it?
Maybe you add some provisions to prevent people from making babies to cash in checks, but I'm assuming writ large I can trust my fellow citizen to make better decisions about their child care than whatever "governmental apparatus" we want to create to do that for them.
The federal government is an extremely poor resource allocator. It knows nothing about local and personal wants and needs. In my view, funding should be dolled out to individuals and maybe local governments. That way money flows from the bottom up, not top down.
The money flow is an extremely important factor: when money flows to individuals, each individual gains "votes" to allocate resources. Those votes informs how and where the economy grows at a granular level. The federal government cannot do this with any level of precision or efficiency.
If higher levels of government need money to do things, they should tax for--this includes some portion of the transfer payments. I know it sounds redundant for the government to tax money they've handed out, but I think governments need to feel the pain of working to get the money in the first place.
I'm also convinced you would dramatically reduce the amount of fraud and favoritism that occurs since decision making will end up being decentralized.
Here's a "hot take" example. The federal government funding child care is a dumb idea.
1) Not everyone needs child care.
2) Not everyone needs child care in the way the federal government wants to provide it.
3) An entire bureaucratic apparatus needs to be developed to define what child care is, what constitutes valid child care, who can provide child care, blah, blah, blah. This will be expensive to manage and will metasticize in its own way over time.
So why not just give people money to people who have young children to do whatever they want to do with it?
Maybe you add some provisions to prevent people from making babies to cash in checks, but I'm assuming writ large I can trust my fellow citizen to make better decisions about their child care than whatever "governmental apparatus" we want to create to do that for them.
It is exactly this thought process that is preventing good fiscal stimulus during recessions.
Well intentioned thoughts like these are a good default for the government running in cruise control - when there is no financial volatility. A stimulus is only required during a recession. In each recession, we have only allowed the Fed to print more money, which hasn't turned out well. Instead of printing this money and raising asset prices, during each recession, fiscal policy should help increase the supply of things direly in need. If a recession is causing food shortages, we don't want printed money to increase demand for food. We would do much better by literally subsidizing X units of food for the next 1 year.
Well intentioned thoughts like these are a good default for the government running in cruise control - when there is no financial volatility. A stimulus is only required during a recession. In each recession, we have only allowed the Fed to print more money, which hasn't turned out well. Instead of printing this money and raising asset prices, during each recession, fiscal policy should help increase the supply of things direly in need. If a recession is causing food shortages, we don't want printed money to increase demand for food. We would do much better by literally subsidizing X units of food for the next 1 year.
How is subsidizing food producers any different than giving everyone money to buy food?
In both cases you give money to food producers and in turn they increase production. The only difference is in your case the price signal is entirely lost.
For example, say we decide to subsidize corn. In theory, the government is taking money out of your pocket and giving it to the corn farmer who in turn gives corn to you a lower cost. So you're still effectively paying more for the same damn thing, the government just did it for you! Over time a massive bureaucracy and incentive structure will grow around corn farming and special interest groups will fight to the death to make sure corn subsidies never go away. Oh, wait, that's actually the world we live in.
Now imagine I give you cash for food--not specifically corn--you get to decide which food you spend it on. Say everyone can't get enough of corn. Sure, you're right, everyone will pay more for corn the difference is though we also see the price go up instead of the government hiding it. This price signal is very important. Once the price of corn gets too high for you, you will switch to some other food, and in turn different areas of the economy will be stimulated.
Food subsidies are exactly how you get big agriculture. Certain players know how to play the government game better and take advantage of it.
If I give everyone money, sure prices go up, but everyone has gained voting power against existing institutional players, and in my opinion, that is exactly how you get competition and growth.
In both cases you give money to food producers and in turn they increase production. The only difference is in your case the price signal is entirely lost.
For example, say we decide to subsidize corn. In theory, the government is taking money out of your pocket and giving it to the corn farmer who in turn gives corn to you a lower cost. So you're still effectively paying more for the same damn thing, the government just did it for you! Over time a massive bureaucracy and incentive structure will grow around corn farming and special interest groups will fight to the death to make sure corn subsidies never go away. Oh, wait, that's actually the world we live in.
Now imagine I give you cash for food--not specifically corn--you get to decide which food you spend it on. Say everyone can't get enough of corn. Sure, you're right, everyone will pay more for corn the difference is though we also see the price go up instead of the government hiding it. This price signal is very important. Once the price of corn gets too high for you, you will switch to some other food, and in turn different areas of the economy will be stimulated.
Food subsidies are exactly how you get big agriculture. Certain players know how to play the government game better and take advantage of it.
If I give everyone money, sure prices go up, but everyone has gained voting power against existing institutional players, and in my opinion, that is exactly how you get competition and growth.
> How is subsidizing food producers any different than giving everyone money to buy food?
Subsidizing production by incentivizing number of units is different from just creating demand and waiting for producers to match up.
By incentivizing number of units of production, say x% incentive for per 1000 bushels of corn AFTER 10k bushels, you are literally incentivizing production of food and suppressing prices. You are asking farmers to use as much land as possible to produce corn. This is assuming that there is a shortage of corn in the market. In this way, the market is flooded with cheap corn and prevents recession caused by corn. The benefit of this approach is that something useful actually got produced besides money.
By only creating demand, production is not guaranteed to ramp up. Many farmers will be happy to take more dollars for the same amount of corn, causing inflation, thus causing fed to raise rates, thus causing recession. The disadvantage of this is that nothing got produced except money.
This fiscal support should be timeboxed (say 1-year during a recession) to prvent the big ag monopolies you are talking about.
We don't even need to think in hypotheticals. Today, the biggest cause of inflation (and thus fed rate hikes and thus recession) is housing. There is some merit to raising rates and flattening demand. But the biggest solution would be to flood the market with supply of housing. Just incentivize builders to build 2 million units within a year with fiscal policy and bam, inflation is gone.
Subsidizing production by incentivizing number of units is different from just creating demand and waiting for producers to match up.
By incentivizing number of units of production, say x% incentive for per 1000 bushels of corn AFTER 10k bushels, you are literally incentivizing production of food and suppressing prices. You are asking farmers to use as much land as possible to produce corn. This is assuming that there is a shortage of corn in the market. In this way, the market is flooded with cheap corn and prevents recession caused by corn. The benefit of this approach is that something useful actually got produced besides money.
By only creating demand, production is not guaranteed to ramp up. Many farmers will be happy to take more dollars for the same amount of corn, causing inflation, thus causing fed to raise rates, thus causing recession. The disadvantage of this is that nothing got produced except money.
This fiscal support should be timeboxed (say 1-year during a recession) to prvent the big ag monopolies you are talking about.
We don't even need to think in hypotheticals. Today, the biggest cause of inflation (and thus fed rate hikes and thus recession) is housing. There is some merit to raising rates and flattening demand. But the biggest solution would be to flood the market with supply of housing. Just incentivize builders to build 2 million units within a year with fiscal policy and bam, inflation is gone.
You’re talking about a how a centrally planned economy can in theory overcome market failure.
> Just incentivize builders to build 2 million units within a year with fiscal policy and bam, inflation is gone.
Why fiscal policy and not zoning laws or something? Why would giving money to developers lead to zero inflation?
> Just incentivize builders to build 2 million units within a year with fiscal policy and bam, inflation is gone.
Why fiscal policy and not zoning laws or something? Why would giving money to developers lead to zero inflation?
> Why fiscal policy and not zoning laws or something? Why would giving money to developers lead to zero inflation?
The fiscal policy is meant to be a one-time, short term boost to the exact items that is causing CPI to go higher. The fiscal policy is meant to be timeboxed. A zoning law is a much more long term thing.
The fiscal policy is meant to be a one-time, short term boost to the exact items that is causing CPI to go higher. The fiscal policy is meant to be timeboxed. A zoning law is a much more long term thing.
Oh, I think there's enough to do in "legacy" areas: roads, bridges, ports and airports, water supplies, electricity transmission grids, and so on. Also flood control measures and drought and wildfire mitigation.
Your industries of the future won't operate well if the basics aren't kept up.
Your industries of the future won't operate well if the basics aren't kept up.
But should these be done only in times of recession? Should we hold some projects in "shovel-ready" state so we can have something to quickly spend money on when the economy starts faltering? Or should the government just do these things when they need to be done?
Government subsidy tends to attract a lot of malinvestment in order to get those dollars. For example, in Biden's bill, there's a subsidy for so-called "smart" glass that darkens when an electric current is applied. This is supposed to reduce solar input from windows by 20%.
Of course, if this mattered, people would have already installed window blinds, which are cheap and easy. External eyebrows and eaves also work. "Smart" glass is an expensive solution, it's been around for 25 years, and nobody wants it.
Of course, if this mattered, people would have already installed window blinds, which are cheap and easy. External eyebrows and eaves also work. "Smart" glass is an expensive solution, it's been around for 25 years, and nobody wants it.
Do you have a source for the smart glass subsidy? I haven't been able to find anything that mentions it.
https://www.prnewswire.com/news-releases/inflation-reduction... - It seems like it just puts it on an equal footing with other solutions.
Unless there's a downside that I'm not aware of, that seems like a reasonable thing to do?
Unless there's a downside that I'm not aware of, that seems like a reasonable thing to do?
Yeah I don't see anyone taking advantage of this if they didn't also expect it to work.
https://www.axios.com/2022/08/30/smart-glass
"Among the Inflation Reduction Act's little-noticed yet potentially game-changing provisions: a big incentive for "smart glass," which can make buildings significantly more energy efficient."
"Among the Inflation Reduction Act's little-noticed yet potentially game-changing provisions: a big incentive for "smart glass," which can make buildings significantly more energy efficient."
Thanks!
One advantage of smart glass is you can get much better wavelength control. For example, you can reflect 90% of infrared light while letting through the visible light. This is really hard to do with a curtain.
If it's not worth the money for people to pay to get this feature, it is not worth paying for it with taxes.
I've seen smart glass demoed at a home show 25 years ago. I thought it was way cool, until they quoted the price. It's no surprise it hasn't gotten any traction since. Oh, it also consumed electric power when in dark mode, as much as a light bulb. It's not a passive system.
Window blinds, louvers, eyebrows, shades, etc., all work fine and are cheap.
BTW, when I lived in Phoenix in the 1970s, people would tape aluminum foil or newspapers on the windows to cut the heat intake. The newspapers would block most of the solar heat, but would let the light through.
Here in Seattle I made some reflective panels I can just stick on the windows when we have a heat wave. Plenty of light still gets in.
I've seen smart glass demoed at a home show 25 years ago. I thought it was way cool, until they quoted the price. It's no surprise it hasn't gotten any traction since. Oh, it also consumed electric power when in dark mode, as much as a light bulb. It's not a passive system.
Window blinds, louvers, eyebrows, shades, etc., all work fine and are cheap.
BTW, when I lived in Phoenix in the 1970s, people would tape aluminum foil or newspapers on the windows to cut the heat intake. The newspapers would block most of the solar heat, but would let the light through.
Here in Seattle I made some reflective panels I can just stick on the windows when we have a heat wave. Plenty of light still gets in.
Would this product be aimed more at businesses and high-rises? Also this seems a bit more aesthetically pleasing than the alternatives and especially newspaper.
Just pointing out how cheap solutions can be.
I don't know. LED light bulbs used to be very expensive. A market study 15 years ago would have found close to zero demand for them. Now they are affordable, they cut electricity bills and people do buy them. Technologies need to go over a certain threshold for demand to show up. The government can help with this.
55" 4K TVs used to be very expensive as well. Now they are so cheap and thin and good I hug one in my basement just for the occasional workout video streamed from YouTube.
Technological progress is the secret to price reduction. No government interaction required or even wanted, it's usually much more likely to create problems...
Technological progress is the secret to price reduction. No government interaction required or even wanted, it's usually much more likely to create problems...
> No government interaction required or even wanted, it's usually much more likely to create problems...
That's generally true, but there are exceptions. Solar panels are very cheap now because of decades of government subsidies. Battery electric vehicles are still more expensive than their regular counterparts, but certainly one day they'll be cheaper (they have many more fewer moving parts). But would they have caught on without government subsidies?
That's generally true, but there are exceptions. Solar panels are very cheap now because of decades of government subsidies. Battery electric vehicles are still more expensive than their regular counterparts, but certainly one day they'll be cheaper (they have many more fewer moving parts). But would they have caught on without government subsidies?
Actually solar panels are very cheap now because the technology used to produce them (the same tech used to produce CPUs and chips and such) has become incredibly cheap due to the widespread high-tech adoption.
Same amazing price reductions with li-ion batteries which are used in every mobile device. EVs? Who knows - but since the government is subsidizing gas prices, that market is already corrupted beyond salvation.
Governmental subsidies managed to skew demand and create market aberrations like the rainy Germany covered in solar panels while their nuclear sector was being closed.
Same amazing price reductions with li-ion batteries which are used in every mobile device. EVs? Who knows - but since the government is subsidizing gas prices, that market is already corrupted beyond salvation.
Governmental subsidies managed to skew demand and create market aberrations like the rainy Germany covered in solar panels while their nuclear sector was being closed.
When rates rise in response to inflation, that’s not a “meaningful” return you’re getting, is it?
The point is that having near or below 0 rates has been a terrible policy for almost everyone, just as increasing them in response to inflation is going to hit most people hard now.
A problem has been kicked down the road for years, it was always going to blow up in our faces.
A problem has been kicked down the road for years, it was always going to blow up in our faces.
The current rate hikes are not due to inflation alone.
IMO, Powell wanted to keep raising rates in 2018, but was hamstrung by Mnuchin and Trump who wanted to keep rates low and the dollar weak. The mini market panic at the time did not help. The COVID meltdown is why we went back to zero. Now he has the perfect excuse to return back things to a normal economic mode.
IMO, Powell wanted to keep raising rates in 2018, but was hamstrung by Mnuchin and Trump who wanted to keep rates low and the dollar weak. The mini market panic at the time did not help. The COVID meltdown is why we went back to zero. Now he has the perfect excuse to return back things to a normal economic mode.
Janet Yellen didn’t want to raise interest rates during the Obama time, and when she tried to raise interest rates during the Trump administration, Trump didn’t like it and didn’t renominate her. Here Janet Yellen was helping Obama by not raising interest rates; she got back to her senses when Trump came in. That’s how the politics of federal reserve is.
>How much is our entire culture the result of cheap money?
Only the parts involving housing, education, transportation, employment, and investments.
Only the parts involving housing, education, transportation, employment, and investments.
College Education pricing has many blames beyond cheap money. The fed getting involved in student loans have totally broken that segment of the economy.
1) Federal loans do not have limits on amount.
2) Loans are non-discharged (you can't shed them in bankruptcy).
3) There is no intensive for schools to charge less. (schools likely should have skin in the game if borrowers end up shedding debt through time expiration or bankruptcy).
4) Loans or the amount of the loans are not weighted at all by the future prospects of the person.
I have other issues with college today. They weren't originally set up for getting people trained for work, but many people now look at them as a form of trade school. But many of the majors available aren't actually job training in any fashion. Most people would be better served by trade schools or apprenticeship, but the US hasn't figured out how to do this well yet. This is more of a cultural problem, that I hope employers can figure out. Coding bootcamps seem to be an answer for the software industry, but we need to push more people that way, rather than college.
1) Federal loans do not have limits on amount.
2) Loans are non-discharged (you can't shed them in bankruptcy).
3) There is no intensive for schools to charge less. (schools likely should have skin in the game if borrowers end up shedding debt through time expiration or bankruptcy).
4) Loans or the amount of the loans are not weighted at all by the future prospects of the person.
I have other issues with college today. They weren't originally set up for getting people trained for work, but many people now look at them as a form of trade school. But many of the majors available aren't actually job training in any fashion. Most people would be better served by trade schools or apprenticeship, but the US hasn't figured out how to do this well yet. This is more of a cultural problem, that I hope employers can figure out. Coding bootcamps seem to be an answer for the software industry, but we need to push more people that way, rather than college.
> Federal loans do not have limits on amount.
This is false.
> Loans are non-discharged (you can't shed them in bankruptcy).
They’re also not collaterized. As a taxpayer, I’d be very much against a non-collaterized loan that anyone can get without much care for credit risk, that’s dischargeable in bankruptcy. In private sector, dischargeable debt with no collateral, like credit card debt, has 20%+ rates for people with low credit scores.
> 3) There is no intensive for schools to charge less. (schools likely should have skin in the game if borrowers end up shedding debt through time expiration or bankruptcy).
If debt is held by federal government, the students defaulting will not be much of an incentive to the school.
> Loans or the amount of the loans are not weighted at all by the future prospects of the person
Indeed. The most recent loan forgiveness plan is basically mechanical engineers subsidizing drama majors.
This is false.
> Loans are non-discharged (you can't shed them in bankruptcy).
They’re also not collaterized. As a taxpayer, I’d be very much against a non-collaterized loan that anyone can get without much care for credit risk, that’s dischargeable in bankruptcy. In private sector, dischargeable debt with no collateral, like credit card debt, has 20%+ rates for people with low credit scores.
> 3) There is no intensive for schools to charge less. (schools likely should have skin in the game if borrowers end up shedding debt through time expiration or bankruptcy).
If debt is held by federal government, the students defaulting will not be much of an incentive to the school.
> Loans or the amount of the loans are not weighted at all by the future prospects of the person
Indeed. The most recent loan forgiveness plan is basically mechanical engineers subsidizing drama majors.
"Most people would be better served by trade schools or apprenticeship, but the US hasn't figured out how to do this well yet. This is more of a cultural problem, that I hope employers can figure out."
Employers including technology companies used to provide training and apprenticeships but purposely shifted their job training costs on to job seekers and the education system. You are in effect looking to those that are largely responsible for the current situation to provide the solution.
Employers including technology companies used to provide training and apprenticeships but purposely shifted their job training costs on to job seekers and the education system. You are in effect looking to those that are largely responsible for the current situation to provide the solution.
> Employers including technology companies used to provide training and apprenticeships but purposely shifted their job training costs on to job seekers and the education system
AFAIU, both historically and today, most apprenticeships are managed by unions through programs funded (in part) by union-contracting companies. This benefited companies as they didn't have to maintain apprentice programs themselves; and it benefited unions and especially apprentices as apprenticeships weren't tied to any specific company, providing some (albeit limited) employment mobility from the outset.
As unions have receded, so to have these programs, or at least the visibility of these programs.
AFAIU, both historically and today, most apprenticeships are managed by unions through programs funded (in part) by union-contracting companies. This benefited companies as they didn't have to maintain apprentice programs themselves; and it benefited unions and especially apprentices as apprenticeships weren't tied to any specific company, providing some (albeit limited) employment mobility from the outset.
As unions have receded, so to have these programs, or at least the visibility of these programs.
This was apparently due to the fact that employees would leave to a different company after receiving the training. However, companies also cut things like pensions which would result in longer term employee retention, so I'm not convinced by this argument.
you forgot the most important variable: the college wage premium, which is the widest ever and shows no signs of narrowing. As long as college grads earn a lot more, tuition will go up. Even after factoring in debt, grads still earn more than non-grads.
Most people would be better served by trade schools or apprenticeship, but the US hasn't figured out how to do this well yet.
This may apply to college dropouts, but college still pays way more than trades, and also trades work req. a lot of training and time and you have to join a guild.
Coding bootcamps seem to be an answer for the software industry
Except that bootcamp grads tend to be woefully deficient in skills and also have a hard time finding jobs, also bootcamps can be very expensive and inflate their success metrics. I am not saying that college is the answer, but it's not bootcamps.
Most people would be better served by trade schools or apprenticeship, but the US hasn't figured out how to do this well yet.
This may apply to college dropouts, but college still pays way more than trades, and also trades work req. a lot of training and time and you have to join a guild.
Coding bootcamps seem to be an answer for the software industry
Except that bootcamp grads tend to be woefully deficient in skills and also have a hard time finding jobs, also bootcamps can be very expensive and inflate their success metrics. I am not saying that college is the answer, but it's not bootcamps.
Yes, #2 is quite pertinent. I think the money would not be so cheap if student loans could be discharged.
Healthcare too. Cheap debt and outsized investment returns have been keeping health systems fat for years.
you have to take into account individual preferences and quality of care. Many countires which have cheaper healthcare either it's ignoring private care coexisting with public , taxes (people with universal care opting for private care but still having to pay higher taxes for universal care, which seems really unfair)
so everything lol
A substantial chunk of the tech industry are speculative zombie companies that are built on the edifice of zero interest.
Since tech companies use other tech company's products this implies the tech industry is a speculative bubble.
It is partially. There's some basis in reality since it's actually very profitable overall, but the investment goes beyond reality.
I'm not saying you shouldn't invest in tech. It's possible this bubble never goes away.
Valuations are definitely in a bubble
Most of these unicorns simply can't turn a profit with their current cost structures. And even if they do, the profits will be so small that the valuations will simply not be justifiable.
Most of these unicorns simply can't turn a profit with their current cost structures. And even if they do, the profits will be so small that the valuations will simply not be justifiable.
I'm not sure dependency implies a bubble, rather a risk. For companies like Amazon(AWS), there certainly is an element of being too big to fail because AWS and similar cloud operations provide so much of the infrastructure for other applications.
The bubble can clearly be seen by the disassociation of valuations from the underlying value, which for many new companies is nothing.
The bubble can clearly be seen by the disassociation of valuations from the underlying value, which for many new companies is nothing.
Scratch that (true, but the whole economy I counter needs cheap enough money to grow); the U.S. government is the biggest borrower I counter-claim. So taxes got to go up while the economy somehow keeps growing for this to be sustainable. Ergo, it is not in a matter of years, and I would say that is the common "secret."
The hope is that everyone is going to march in line and not go out asking for raises due to inflation; so that we end up with "hyper-inflation" before the supply chain system stabilizes, maybe the Russo-Ukraine conflict sees some light, and the U.S. Treasury can decide they can't sustain this any longer.
Thus, we are praying for all these pieces to kinda fall into place, so we don't end up with hyper-inflation, recession and interest rates going down all at the same time.
P.S. You can follow the target to actual rates here https://www.newyorkfed.org/markets/desk-operations/reverse-r...
Click All to see the difference in scale we are talking about to the past. 2 Trillions are parked to the Fed by banks, accumulating the new high interest, waiting for a signal to be re-enter.
The hope is that everyone is going to march in line and not go out asking for raises due to inflation; so that we end up with "hyper-inflation" before the supply chain system stabilizes, maybe the Russo-Ukraine conflict sees some light, and the U.S. Treasury can decide they can't sustain this any longer.
Thus, we are praying for all these pieces to kinda fall into place, so we don't end up with hyper-inflation, recession and interest rates going down all at the same time.
P.S. You can follow the target to actual rates here https://www.newyorkfed.org/markets/desk-operations/reverse-r...
Click All to see the difference in scale we are talking about to the past. 2 Trillions are parked to the Fed by banks, accumulating the new high interest, waiting for a signal to be re-enter.
What were interest rates in the late 90s? hmm...even higher than today, yet that was the biggest tech bubble ever. If VCs and other investors expect to make >100% in a year , what does it matter if the interest rate is 3% or 1%?
Startups generally have only very limited (if any) access to money anyway, so making money more expensive for established companies is probably a net positive for folks who are legitimately trying to start real software businesses.
Not really. The money a startup is going to make is farther in the future than an established company.
If you look at discounted future cashflow, a startup as an investment opportunity is much more influenced by the interest rate than an established company because a larger % of the value is coming from money farther in the future.
Basically 20% of net present value of Microsoft comes from the money it'll make next year and 5% from the money it'll generate 5 yrs from now.
But a startup is the opposite where 0% of the value of the startup comes from the profit it'll make next year, and 20% from the profit it'll make in 5.
And when interest rates change it reduces the present value of the profits in 5 years by far more than it reduces the profits next year. Reducing the value of the startup relative to Microsoft, reducing the startups ability to get funded more than Microsofts.
If you look at discounted future cashflow, a startup as an investment opportunity is much more influenced by the interest rate than an established company because a larger % of the value is coming from money farther in the future.
Basically 20% of net present value of Microsoft comes from the money it'll make next year and 5% from the money it'll generate 5 yrs from now.
But a startup is the opposite where 0% of the value of the startup comes from the profit it'll make next year, and 20% from the profit it'll make in 5.
And when interest rates change it reduces the present value of the profits in 5 years by far more than it reduces the profits next year. Reducing the value of the startup relative to Microsoft, reducing the startups ability to get funded more than Microsofts.
> reducing the startups ability to get funded more than Microsofts.
So for 99% of startups (who don't raise venture capital anyway) there is no difference. But for Microsoft there is a huge difference, which is why the big tech companies are doing layoffs. Whereas we're not seeing many Indiehackers posts about people working out of their parents' basements who are laying themselves off.
So for 99% of startups (who don't raise venture capital anyway) there is no difference. But for Microsoft there is a huge difference, which is why the big tech companies are doing layoffs. Whereas we're not seeing many Indiehackers posts about people working out of their parents' basements who are laying themselves off.
Can you elaborate? When I think of tech I think of venture funded (equity side), not debt funded.
The argument is that easy "free money" causes money to flow into equities, and that money goes in search of better returns which includes venture funding.
The moment the economy tightens up, suddenly the venture funds have less money.
I'm not sure what's causal in it all, but from the outside it certainly looks like that's what happens.
The moment the economy tightens up, suddenly the venture funds have less money.
I'm not sure what's causal in it all, but from the outside it certainly looks like that's what happens.
>suddenly the venture funds have less money.
It's not that they have less money, it's just that when 1yr treasuries are paying over 4%, the returns in risk-adjusted investments need to either return a lot more or die.
It's not that they have less money, it's just that when 1yr treasuries are paying over 4%, the returns in risk-adjusted investments need to either return a lot more or die.
Probably both matter: suppose your grandma is your angel investor. If suddenly equities plummet, grandma sees less in her portfolio, so the funds available for angel investing are no longer there.
This is happening to me right now with my parents not being able to help as much with my kids' college tuition.
This is happening to me right now with my parents not being able to help as much with my kids' college tuition.
Let them fail.
> we've got to get them back somewhere near historic normals
Estimating the neutral interest rate, i.e. "the real (net of inflation) interest rate that supports the economy at full employment/maximum output while keeping inflation constant" [1], is closer to art than science. It's almost certainly not a simple historical average, particularly not in a dynamic economy.
Estimating the neutral interest rate, i.e. "the real (net of inflation) interest rate that supports the economy at full employment/maximum output while keeping inflation constant" [1], is closer to art than science. It's almost certainly not a simple historical average, particularly not in a dynamic economy.
It does not need to be that complex. It could be the interest rate where the supply and demand of money meet, assuming the Fed stays out of the way.
The Fed does not need to skew the market for money by conducting QE or QT, or manipulating short term rates.
I'm not a "no-Fed"-type of guy. The Fed is great at a lot of things. Their research arm is top-notch. They regulate and oversee banks. They are the bank of the commercial banks; in particular they are a lender of last resort for them. Also they can be a lender of last resort for US dollars for other central banks, and for the World Bank and the IMF. They can monitor and interdict financial crime. There are lots of things to do.
Stimulating the economy should not be their business.
The Fed does not need to skew the market for money by conducting QE or QT, or manipulating short term rates.
I'm not a "no-Fed"-type of guy. The Fed is great at a lot of things. Their research arm is top-notch. They regulate and oversee banks. They are the bank of the commercial banks; in particular they are a lender of last resort for them. Also they can be a lender of last resort for US dollars for other central banks, and for the World Bank and the IMF. They can monitor and interdict financial crime. There are lots of things to do.
Stimulating the economy should not be their business.
>we've got to get them back somewhere near historic normals at some point.
Not a monetary expert here, but do we? Japan has been at zero/near zero since the mid 90s.
Not a monetary expert here, but do we? Japan has been at zero/near zero since the mid 90s.
Japans declining population is surely influenced to some extent by their fiscal policy. I don’t think being near as low as it has for them has been a huge success?
there's a joke in economics. there's 4 types of economies: developed, developing, japan and argentina. japan is weird ash and economics still doesn't understand why but it's a pretty safe bet that it won't translate super well to America.
They've also been stagnant since the 90s
This is an honest question borne of ignorance: in what ways does that matter? I'm sure it does, but people over there are employed, they have a larger safety net, more accessible healthcare access AND better outcomes, seemingly less crime, education seems to be something of a wash (though there is so much variability in the US it's almost a waste of time to do a nation-to-nation comparison).
I only know the major bullet points though, and I haven't found this terribly easy to parse myself. I'm also quite confident that stagnation in the US would manifest differently (not that it must but that it would) so this is really just overall curiosity.
I only know the major bullet points though, and I haven't found this terribly easy to parse myself. I'm also quite confident that stagnation in the US would manifest differently (not that it must but that it would) so this is really just overall curiosity.
This seems like a very hand-wavy comparison. By the numbers, the difference is enormous--Japan's average household net-adjusted disposable income per capita is $28,900. For direct comparison, the USA's average is 77% higher than Japan's at $51,100. Japan's average is even below the OECD average (which includes a mix of leading Western countries and less developed countries like Costa Rica and and Hungary) by 5%.
[0]https://www.oecdbetterlifeindex.org/countries/japan/ [1]https://www.oecdbetterlifeindex.org/countries/united-states/
[0]https://www.oecdbetterlifeindex.org/countries/japan/ [1]https://www.oecdbetterlifeindex.org/countries/united-states/
> This seems like a very hand-wavy comparison.
That's a pretty ungenerous response when I was asking in good faith to understand, even expressing my own ignorance. I only know people that hold dual citizenship, and their experience of Japan certainly isn't some big step down from the US.
That's a pretty ungenerous response when I was asking in good faith to understand, even expressing my own ignorance. I only know people that hold dual citizenship, and their experience of Japan certainly isn't some big step down from the US.
It doesn't, really. A society that plateaus at a high standard of living is a very good end result.
However, the world isn't equal, nor is the wealth equally distributed. If all of the rich, developed world was to slow down and become stagnant like Japan, where will the demand for goods and commodities made by the developing world come from?
Huge western demand helped lift hundreds of millions in China and India out of poverty, for instance.
Stagnant growth might be good for an individual country, but it can doom developing countries to similar stagnancy.
However, the world isn't equal, nor is the wealth equally distributed. If all of the rich, developed world was to slow down and become stagnant like Japan, where will the demand for goods and commodities made by the developing world come from?
Huge western demand helped lift hundreds of millions in China and India out of poverty, for instance.
Stagnant growth might be good for an individual country, but it can doom developing countries to similar stagnancy.
Japan also has low inflation.
What does "historic normals" mean? Obviously rates need to be going up right now, but if you look at the very long (i.e. centuries) trend of natural interest rates, there's a clear monotonic downward trend. Who's to say the natural rate of interest isn't zero?
8-15%. I'm looking forward to it. It'll force more people to be more financially responsible. No one should finance furniture, ATVs, or electronics. If you can't pay cash for these things, save, or don't buy.
Edit: @Analemma That's just the extreme end of the scale. 30yr fixed mortgage rates were above 10% during all the 1980s[♤]. I'd like to see a return to that.
[♤] https://fred.stlouisfed.org/series/MORTGAGE30US
Edit: @Analemma That's just the extreme end of the scale. 30yr fixed mortgage rates were above 10% during all the 1980s[♤]. I'd like to see a return to that.
[♤] https://fred.stlouisfed.org/series/MORTGAGE30US
The historical interest rate for savers is negative. Before the invention of fractional rate banking, if you had money you had to pay guards to protect it for you.
This definitely needs a citation. Why would the natural rate be 8%, never mind 15%? Apart from the Volcker Shock it's been less than that for literally all of American history [1]. Are you sure you're not just assuming that whatever the rate was in your formative years is "natural"?
[1]: https://advisor.visualcapitalist.com/wp-content/uploads/2020...
[1]: https://advisor.visualcapitalist.com/wp-content/uploads/2020...
Either you can create value (which seems reasonable as long as we receive free energy from the sun) in time or not. If you can, the natural interest rate cannot be zero.
We are at the moment in time when we can make the most out of “thin air”. It makes no sense that the rate is effectively zero.
We are at the moment in time when we can make the most out of “thin air”. It makes no sense that the rate is effectively zero.
People get this backwards all the time. The fed did not cause cheap money, an aging population, sovereign wealth funds, and increasing inequality caused cheap money. The fed just responds by setting the interest rate to appropriately set the interest rate so we have full employment.
The Fed creates money, which nothing else can do. Of course the money supply has its own ebb and flow from private banks and such offering loans, but it's hard to ignore M2 doubling every 10 years.
I agree with your sentiment but this isn’t true, in fact for most of the Fed’s life it was not the primary creator of money.
Fractional reserve banking (which, by definition, the Fed is) creates money. If I deposit $1,000 into my local bank, and they turn around and lend $900 of that back out, that creates money.
Fractional reserve banking (which, by definition, the Fed is) creates money. If I deposit $1,000 into my local bank, and they turn around and lend $900 of that back out, that creates money.
> If I deposit $1,000 into my local bank, and they turn around and lend $900 of that back out, that creates money.
While you are right about fractional reserve creating money, this example is a common misconception. When you deposit $1000, the bank assumes a reserve of $1000 and lends out $9000. This, is assuming the bank has enough reserves on hand. And reserves for the bank is either central bank money (given by fed) or treasury bonds (bought from your $1000 deposit) or MBS (bought from your deposit).
While you are right about fractional reserve creating money, this example is a common misconception. When you deposit $1000, the bank assumes a reserve of $1000 and lends out $9000. This, is assuming the bank has enough reserves on hand. And reserves for the bank is either central bank money (given by fed) or treasury bonds (bought from your $1000 deposit) or MBS (bought from your deposit).
I’m not sure you understand how this works. It’s not a common misconception, it’s literally FRB.
The bank might turn around and borrow from the Fed and use the deposits as reserves, but that has more to do with rates markets and nothing to do with FRB.
The bank might turn around and borrow from the Fed and use the deposits as reserves, but that has more to do with rates markets and nothing to do with FRB.
This video series might help more: https://www.youtube.com/watch?v=KvpbQlQwl0A
> If I deposit $1,000 into my local bank, and they turn around and lend $900 of that back out, that creates money
While it is not technically "creating" new money it is expanding the supply of money (credit) in the economy. In the above example you still have $1000 owed to you and the company/person receiving that loan now has $900. That's a total of $1900 of "real" money generated from your $1000 deposit. The balance sheets net out to zero but there is in effect an extra $900 now in the economy.
You’re splitting hairs that can’t be split. Increasing the money supply is creating new money.
Money is created and destroyed all the time.
Money is created and destroyed all the time.
Money supply is not a fixed constant, it never has been.
But under your argument, then the Fed doesn’t technically create money either. It lends money like any other bank. Now this money is created out of thin air, but in theory it’s eventually repaid.
But under your argument, then the Fed doesn’t technically create money either. It lends money like any other bank. Now this money is created out of thin air, but in theory it’s eventually repaid.
A bank isn't creating money in the same way the Fed does. Yes they can increase the "money supply," which for whatever academic reason doesn't include the liabilities, but not the money in circulation. And they can only physically lend out the amount that's deposited, or legally more like 90%, and they're hosed if everyone wants their money back.
Only the Fed can create money out of nowhere. They can create endless dollars and owe nothing, diluting the currency permanently. Inflation and other metrics keep them in check. The common sense is actually right, not the overly technical explanation of lending that somehow concludes that the Fed isn't special.
> in theory it’s eventually repaid
It doesn't have to be, and it hasn't been. M2 has generally just gone up.
Only the Fed can create money out of nowhere. They can create endless dollars and owe nothing, diluting the currency permanently. Inflation and other metrics keep them in check. The common sense is actually right, not the overly technical explanation of lending that somehow concludes that the Fed isn't special.
> in theory it’s eventually repaid
It doesn't have to be, and it hasn't been. M2 has generally just gone up.
The money supply has been steadily but quickly increasing for decades now. That can't be a result of fractional reserve banking alone. When I say the Fed creates money, I'm referring to the virtual printing.
The supply of money has been increasing since the invention of money. Humankind would be incredibly resource constrained otherwise.
Money used to just be precious metal or correspond to it, so no this isn't how it's been from the start.
Why resource-constrained? It's money, not something with utility. In any expanding economy, you generally get more buying power spending later rather than now, regardless of changes in money supply. Only if the currency is being diluted too much, you have to park your savings in something scarce instead, like land or low-risk stocks. It's not all that different from just using a fixed supply of currency (I'm not counting lending as creating money; it's not the same thing).
Why resource-constrained? It's money, not something with utility. In any expanding economy, you generally get more buying power spending later rather than now, regardless of changes in money supply. Only if the currency is being diluted too much, you have to park your savings in something scarce instead, like land or low-risk stocks. It's not all that different from just using a fixed supply of currency (I'm not counting lending as creating money; it's not the same thing).
Yep, we print 40% of all known money in the last 2 years, needlessly lock everyone down, and then complain that the rent is too damn high
Poor landlords must be suffering owning houses and all while everyone else is enjoying facing homelessness
This is an insane assertion. The fed has made consistent huge mistakes in monetary policy. No serious investor or public financial figure thinks these cheap rates were necessary
Lots of people who wished the natural interest rate was lower liked to blame the Fed instead of fundamentals. But if the Fed has set the interest rates too low we would have had runway inflation from an overheating economy instead of a low prime age employment % (which suggests the interest rates were too high).
No you don’t get it. Risk assets are priced from interest rates. Low interest rates inflated assets, which caused mass wealth inequality and excess wealth made by owners of capital. The picture is way more complex, we have had deflation due to outsourcing and technology. So it’s been impossible to get inflation.
This is an insane assertion, if only because the Fed is run by public financial figures.
We live in a world that is awash in capital because old people & rich people have a large amount of capital. When the supply of something is high, the price goes down. And the price of capital is interest rates.
The excess liquidity comes from low rates. No serious financial investor thinks otherwise
I had literally never thought of this in any way. I've just finished reading two papers: one which shows that net-investment isn't really correlated to savings or interest rates which exactly supports your position (with data!); and, a second which shows that the ratio of old-to-young people is an incredibly good predictor of interest rates (with data!).
You're both right? I suspect that means there must be a third option.
You're both right? I suspect that means there must be a third option.
$6T of QE is about 1/10th the size of the US bond market and 1/20th the size of the US stock market.
Money-"printing" creates the need to stash money away, which leads to passive investing since most people who have savings aren't market experts, which leads to perpetual bubbles. There's no option to simply hold money. This investment at least tends to go into profitable things like stocks, but not in a proportionate way. It hardly matters how profitable a company is; you just expect the stock to go up regardless because people are parking money there.
Basically, ridiculous startups and ridiculous corporate projects get funding when they shouldn't.
Basically, ridiculous startups and ridiculous corporate projects get funding when they shouldn't.
Oh and house prices in some places are ridiculous too, not in the whiny "I can't afford a house" way (I can) but just looking at the market. They have little to do with the actual utility you get out of home ownership, but that's ok because you're getting a growth asset under an effectively govt-subsidized loan. How can you tell, compare to rent, which is just the price of living.
This is going to generate a recession though which will drag down long interest rates, and they'll slash short rates in a panic and we're back at groundhog day again.
If you want persistently higher long interest rates then you want persistently higher inflation expectations.
If you want persistently higher long interest rates then you want persistently higher inflation expectations.
Given that mortgage rates recently rose past 6%, seems to me this latest rate increase is going to put strong pressure on house prices. The rate has a huge impact on the monthly payment required to service a loan, more so than is immediately apparent without doing the math.
Given that mortgage rates recently rose past 6%, seems to me this latest rate increase is going to put strong pressure on house prices. The rate has a huge impact on the monthly payment required to service a loan, more so than is immediately apparent without doing the math.
People keep hoping or expecting this, yet prices keep going up. As long as wages for top earners keep rising, so will demand in expensive areas. Also, real estate did well in the 90s despite high interest rates, too.
People keep hoping or expecting this, yet prices keep going up. As long as wages for top earners keep rising, so will demand in expensive areas. Also, real estate did well in the 90s despite high interest rates, too.
Prices are not dropping, but sales are drastically slowing down and properties are staying on the market for longer. At least in the Bay Area, a few months ago it was unheard of for a home to stay on the market a month. Now they're sitting there. Definitely think rates are affecting how much buyers are willing to spend.
Slowing sales could be the result of low inventory. That is, sellers are not eager to list/sell. Everyone is waiting and seeing.
Right, it's a terrible time to take on a new mortgage, so there is a strong disincentive for owners to sell at this time.
If you're on a fixed-rate 3% mortgage that loan is looking extremely valuable vs. the best rate you can get right now.
If you're on a fixed-rate 3% mortgage that loan is looking extremely valuable vs. the best rate you can get right now.
A buddy of mine ended up renting out his condo right next to Dolores Park (ie: pretty great location in SF) after it sat on the market for a few months (including lowering the price). It rented immediately. Places are not selling.
Low inventory is why they were going in a couple days.
Home sales have been falling for several months in all the major US metros though.
We won't see 2008 again but prices will be coming back down to earth from their pandemic rocket ride.
https://www.nar.realtor/blogs/economists-outlook/existing-ho...
We won't see 2008 again but prices will be coming back down to earth from their pandemic rocket ride.
https://www.nar.realtor/blogs/economists-outlook/existing-ho...
I look at rent to gauge the real cost of living somewhere, cause that takes land speculation out of the equation. It seems like house prices in expensive areas have been rising way more quickly than rent.
So yes, I expect this rate hike to cause a big dump in house prices. In a few months or so I'll be right or wrong.
So yes, I expect this rate hike to cause a big dump in house prices. In a few months or so I'll be right or wrong.
So yes, I expect this rate hike to cause a big dump in house prices. In a few months or so I'll be right or wrong.
But it's also possible that it's priced in. It's been expected for the past 6 months the fed would raise rates a lot.
But it's also possible that it's priced in. It's been expected for the past 6 months the fed would raise rates a lot.
Could be. There's a recent dip in median Sunnyvale home prices that might be this, but I wasn't following the news enough to tell how closely the Fed decision aligned with expectations.
Prices have corrected across the market, where are you seeing prices going up.
Have they? Certainly have not seen this beyond prices for rural/exurb properties that shot up during covid - even those prices have just come back to what they were before covid.
That's what I meant by the correction - correction to pre COVID levels. The truth is there are many areas where prices have yet to correct to pre-COVID levels of price and growth. If this is driven by inflation then it may take some time (~5 years or so based on what I am reading elsewhere). If it doesn't then maybe this is a systemic increase due to the shift of high earners out of traditional HCOL areas (Bay area, NYC)
They are coming down (maybe not in SV), but I've being watching Riverside county and it's being very noticeable.
> yet prices keep going up
Prices have plateau'd or gone down
Prices have plateau'd or gone down
As someone that has been exploring real estate for the first time, after speaking with some people it seems that mortgages have generally been less expensive than rent? Good luck finding something like that with today's prices and interest rates.
Rent has skyrocketed recently, largely because people are afraid to buy houses right now, thus more demand for rental units. A mortgage may still be cheaper if you can stomach the reality that you might quickly end up underwater.
That said, if you have rent control locked in, the choice is likely easy.
That said, if you have rent control locked in, the choice is likely easy.
My comment is saying rents are cheaper not mortgages.
>> it seems that mortgages have generally been less expensive than rent?
This is very location-dependent. In some cities it is true, it some it isn't, in some it depends on the segment of the market.
This is very location-dependent. In some cities it is true, it some it isn't, in some it depends on the segment of the market.
If this isn't true for your area, the general advice is to wait a few years. Your mortgage payments are locked in, rent increases year-over-year at single- or double-digit percents.
Mortgages can be refinanced at a lower rate when the market allows, correct?
Correct, however there are costs associated with refinancing (either "built in" or upfront) and in some cases the refinanced loan has fewer protections. For example, a purchase loan in California is non-recourse, but a refinance is not.
However, you can get "trapped" as I did if you bought near a high point, and then interest rates and prices dropped, and since I was now "underwater" I couldn't refinance, even though I was perfectly capable and did continue to pay on the original loan. Eventually the property appraised high enough to refinance again.
However, you can get "trapped" as I did if you bought near a high point, and then interest rates and prices dropped, and since I was now "underwater" I couldn't refinance, even though I was perfectly capable and did continue to pay on the original loan. Eventually the property appraised high enough to refinance again.
> For example, a purchase loan in California is non-recourse, but a refinance is not.
That's not the case for refinances after Jan 1, 2013.
That's not the case for refinances after Jan 1, 2013.
IF/WHEN the market allows.
There is no particular reason to believe rates will go down again. They might, they might not. Historically todays rates are around the normal low.
There is no particular reason to believe rates will go down again. They might, they might not. Historically todays rates are around the normal low.
Housing demand is supported by investors who probably never pay interest on the homes they buy, so I doubt you will see much decrease. I don't think you can really control home prices with interest rates any more.
It seems there are still lots of mortgages issued in the US. Prices are set at the margin, so small decreases in demand can have a big impact on price. Looking at the data, I don’t see evidence that no one loans money to buy houses anymore.
https://www.statista.com/statistics/205937/us-mortgage-origi...
https://www.statista.com/statistics/205937/us-mortgage-origi...
If (when) the Fed starts selling mortgage-backed securities in its balance sheet ($2 Tn), then it will be a bloodbath closer to 2007. And again, there's the problem of people with negative equity just walking out, causing a vicious cycle.
Quite possibly. It depends on what happens to supply and how desperate people are to sell.
>> The rate has a huge impact on the monthly payment required to service a loan
Which means people with 2% mortgage rates aren't going to be likely to sell their houses and buy another one at 7%. Which puts upward pressure on house prices due to fewer houses on the market. You have both demand and supply effects.
In the past in the US, nominal house prices haven't gone down during periods of rising interest rates. Maybe it will be different this time, maybe it won't.
Which means people with 2% mortgage rates aren't going to be likely to sell their houses and buy another one at 7%. Which puts upward pressure on house prices due to fewer houses on the market. You have both demand and supply effects.
In the past in the US, nominal house prices haven't gone down during periods of rising interest rates. Maybe it will be different this time, maybe it won't.
Good time to buy if you’re wealthy with cash on hand.
The biggest advantage of real estate investing is the easy access to cheap, reliable leverage. This is absolutely not a good time to get into a business that requires debt 4x higher than equity to make money.
can you elaborate a little more?
On a related note, since mid-April, the Fed has withdrawn –$140B of liquidity from the financial system:
https://news.ycombinator.com/item?id=32929454
and earlier this year announced that it plans to continue withdrawing liquidity from the financial system at the rate of $90B/month for the foreseeable future. The innocuous term for these withdrawals is "quantitative tightening."
There are no historical precedents for quantitative tightening of this magnitude.
It's the first time any central bank has tried it at this scale in a modern monetary regime.
https://news.ycombinator.com/item?id=32929454
and earlier this year announced that it plans to continue withdrawing liquidity from the financial system at the rate of $90B/month for the foreseeable future. The innocuous term for these withdrawals is "quantitative tightening."
There are no historical precedents for quantitative tightening of this magnitude.
It's the first time any central bank has tried it at this scale in a modern monetary regime.
Note that many people on this and other forums have been talking about how the fed just prints money forever and is out of control. This is them destroying money.
It might not be enough for you personally, but let’s not pretend that money printing only goes in one direction.
Note: as a base expectation, you want to be printing a small amount of money unless circumstances dictate otherwise. In a growing economy, if the growth in the money supply doesn’t keep up with growth, you’ll eventually see deflation. This is explained by the following identity (where the velocity of money is typically observed to be fairly constant):
[Price] * [output] = [velocity of money] * [money supply]
It might not be enough for you personally, but let’s not pretend that money printing only goes in one direction.
Note: as a base expectation, you want to be printing a small amount of money unless circumstances dictate otherwise. In a growing economy, if the growth in the money supply doesn’t keep up with growth, you’ll eventually see deflation. This is explained by the following identity (where the velocity of money is typically observed to be fairly constant):
[Price] * [output] = [velocity of money] * [money supply]
To be fair, wasn't this preceded by 'quantitative easing' which itself had 'no historical precedents?'
Like, it's in proportion to the last big thing we did, albeit in the other direction. I'd argue that's pretty close to precedent.
Like, it's in proportion to the last big thing we did, albeit in the other direction. I'd argue that's pretty close to precedent.
There's at least one other historical precedent for insane levels of quantitative easing, Japan: https://fred.stlouisfed.org/series/JPNASSETS
Japan has been at it for a long time: https://research.stlouisfed.org/publications/economic-synops...
But AFAIK there's no historical precedent for persistently going in the other direction at such an insane scale.
Japan has been at it for a long time: https://research.stlouisfed.org/publications/economic-synops...
But AFAIK there's no historical precedent for persistently going in the other direction at such an insane scale.
oh c'mon. there wasn't really precedent for QE before '08 and they did it anyway. there sure ash wasn't precedent for buying corp debt ETFs as a even more radical form of QE in '20. the fed did those anyway but now that they're trying to wind it down that's somehow radical and needs a "innocuous term"??
$90B/month isn't even making much of a dent in the balance sheet.
$90B/month isn't even making much of a dent in the balance sheet.
Here is the historical (since 2004) time series and data: https://fred.stlouisfed.org/series/WALCL
at $90B/month it will take 89 months to unload.
> $90B/month it will take 89 months to unload
The optimal Fed balance sheet is estimated to be around $4tn [1].
A Fed with a ballooning balance sheet distorts financial markets. A Fed with no assets must do weird stuff to fight inflation, which distorts financial markets. (In a non-reserve case, a central bank with no reserves goes bust.)
[1] https://advisors.vanguard.com/insights/article/thefedsplanto...
The optimal Fed balance sheet is estimated to be around $4tn [1].
A Fed with a ballooning balance sheet distorts financial markets. A Fed with no assets must do weird stuff to fight inflation, which distorts financial markets. (In a non-reserve case, a central bank with no reserves goes bust.)
[1] https://advisors.vanguard.com/insights/article/thefedsplanto...
Very interesting. So historically, it appears that the FED balance sheet reserves is 25% of GDP. I wonder what it is for other countries. Especially rapidly developing ones.
> wonder what it is for other countries
It varies pretty widely. I don't think there is good macroeconomic theory for its correct value, or even if there is a correct value.
https://tradingeconomics.com/country-list/central-bank-asset...
It varies pretty widely. I don't think there is good macroeconomic theory for its correct value, or even if there is a correct value.
https://tradingeconomics.com/country-list/central-bank-asset...
It doesn't seem 100% accurate (see: UK balance sheet). But the pattern is evident. The older/more developed an economy, the larger the central bank balance sheet.
Which also seems like a correct line of thinking to me. In younger developing countries, more money is created by individuals/businesses via credit. Central banks don't need a large balance sheet to encourage more lending, banks already have a high demand for loans and have very high interest rates for credit.
In older/developed countries, less money is created by individuals/businesses via credit. So central banks are forced to increase the size of their balance sheet which allows banks to offer more money for lending by reducing the interest rates because without low interest rates, there will be no credit growth.
Which also seems like a correct line of thinking to me. In younger developing countries, more money is created by individuals/businesses via credit. Central banks don't need a large balance sheet to encourage more lending, banks already have a high demand for loans and have very high interest rates for credit.
In older/developed countries, less money is created by individuals/businesses via credit. So central banks are forced to increase the size of their balance sheet which allows banks to offer more money for lending by reducing the interest rates because without low interest rates, there will be no credit growth.
Fed doesn't have to fight with inflation if it not creating one. So Fed's balance sheet could be as well $0
> Fed doesn't have to fight with inflation if it not creating one. So Fed's balance sheet could be as well $0
Inflation has multiple causes. Fixed-money economies experienced inflation and deflation throughout antiquity.
Inflation has multiple causes. Fixed-money economies experienced inflation and deflation throughout antiquity.
Still, Fed is responsible for 90% of inflation.
> Fed is responsible for 90% of inflation
You're really jumping straight from proposing a zero-reserve central bank to theorizing the source of inflation?
You're really jumping straight from proposing a zero-reserve central bank to theorizing the source of inflation?
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$90B/month = $1.1T/year in withdrawals of liquidity from the financial system.
A trillion here and trillion there, and pretty soon we'll be talking about real money.
A trillion here and trillion there, and pretty soon we'll be talking about real money.
Third straight hike and core CPI is going up at more than half a percentage point monthly.
CPI numbers, as reported, are very misleading. Nominally, it looks like its slowing down or plateauing (from 9% to 8.5%), but that's because the headlines always report the YoY number. The base effect is going to skew this towards a "inflation slowing down" narrative anyway.
The MoM figures are far more relevant and they're not looking good at all, especially since its now moving towards the sticky kind of inflation (services, rent).
CPI numbers, as reported, are very misleading. Nominally, it looks like its slowing down or plateauing (from 9% to 8.5%), but that's because the headlines always report the YoY number. The base effect is going to skew this towards a "inflation slowing down" narrative anyway.
The MoM figures are far more relevant and they're not looking good at all, especially since its now moving towards the sticky kind of inflation (services, rent).
I'm wondering if they are going to bite the bullet and raise like Volcker.
But again I realized that I actually do not understand the source of inflation and how much contribution each source has. We all know that the war, Covid and monetary policy are three sources but are there other structural sources? What about the trade quarrel between US and China? How much does it hurt for each industry?
I should read some papers and talk to people in different industries to get some ideas.
But again I realized that I actually do not understand the source of inflation and how much contribution each source has. We all know that the war, Covid and monetary policy are three sources but are there other structural sources? What about the trade quarrel between US and China? How much does it hurt for each industry?
I should read some papers and talk to people in different industries to get some ideas.
>I actually do not understand the source of inflation
I think this is the source of the problem:
https://www.bls.gov/charts/employment-situation/civilian-lab...
Demand is coming from 100% of the population, but supply comes only from those who are working. Thanks to Covid, the supply of workers is less, but also there is a long term trend (maybe compensated for by productivity gains..)
It's interesting to compare it with this one:
https://www.bls.gov/charts/employment-situation/employment-p...
This one shows the percent of people working of employment age. This doesn't look so bad, but the people not of employment age also create demand.
IMHO, the only price that really matters is the cost of labor (no matter what they say). IMHO, because the value of money is defined by average annual salary (the real value is work, not money).
https://fred.stlouisfed.org/series/CES0500000003
I think this is the source of the problem:
https://www.bls.gov/charts/employment-situation/civilian-lab...
Demand is coming from 100% of the population, but supply comes only from those who are working. Thanks to Covid, the supply of workers is less, but also there is a long term trend (maybe compensated for by productivity gains..)
It's interesting to compare it with this one:
https://www.bls.gov/charts/employment-situation/employment-p...
This one shows the percent of people working of employment age. This doesn't look so bad, but the people not of employment age also create demand.
IMHO, the only price that really matters is the cost of labor (no matter what they say). IMHO, because the value of money is defined by average annual salary (the real value is work, not money).
https://fred.stlouisfed.org/series/CES0500000003
The main source is definitely monetary policy, this was supremely obvious from the enormous asset bubble that ballooned out of the pandemic with risk-on assets like tech stocks and crypto exploding in valuation. The reason this happened is when interest rates are held at near zero then future profits are valued significantly higher (normally they are discounted by the interest rate, or more correctly the "risk free return" of US 10Y government bonds).
It also manifested in higher savings balances etc.
The main reason this happened was the Fed didn't trust the administration to deploy appropriate fiscal stimulus as in the past trying to rely on US politicians has been a poor choice. Unfortunately we ended up with both monetary policy and fiscal policy deployed at full ball. If we had seen a weaker or more targeted monetary policy that aimed to just unfreeze credit markets and have fiscal policies step up to handle depressed employment/industry shutdowns the fallout would have been significantly decreased.
For instance China did cut rates and reduce the reserve requirement ratio (US also did this, it was essentially zero until start of 2022) they didn't get anywhere near that "essentially zero" rate that the US did. This means their domestic inflation remained manageable, most of their inflation is attributable to imported sources like energy and commodities. They instead pursued more targeted policies aimed at addressing specific industries and socioeconomic groups affected.
So yeah, it still is a combination of things but monetary policy in the US had an outsized impact on inflation globally compared to circumstantial factors IMO.
It also manifested in higher savings balances etc.
The main reason this happened was the Fed didn't trust the administration to deploy appropriate fiscal stimulus as in the past trying to rely on US politicians has been a poor choice. Unfortunately we ended up with both monetary policy and fiscal policy deployed at full ball. If we had seen a weaker or more targeted monetary policy that aimed to just unfreeze credit markets and have fiscal policies step up to handle depressed employment/industry shutdowns the fallout would have been significantly decreased.
For instance China did cut rates and reduce the reserve requirement ratio (US also did this, it was essentially zero until start of 2022) they didn't get anywhere near that "essentially zero" rate that the US did. This means their domestic inflation remained manageable, most of their inflation is attributable to imported sources like energy and commodities. They instead pursued more targeted policies aimed at addressing specific industries and socioeconomic groups affected.
So yeah, it still is a combination of things but monetary policy in the US had an outsized impact on inflation globally compared to circumstantial factors IMO.
Retiring boomers and an aging population along with disability due to long COVID are leading to not enough workers. That is leading to wage inflation along with unionization since the workers currently are holding more of the cards.
That is the bridge too far for the Fed so they're cracking down like Volker. They didn't care about housing prices, rents, college tuition, the commodities inflation in 2010-2014, etc. Normal jobs like working in a restaurant are seeing wage inflation now and that can't be tolerated.
That is the bridge too far for the Fed so they're cracking down like Volker. They didn't care about housing prices, rents, college tuition, the commodities inflation in 2010-2014, etc. Normal jobs like working in a restaurant are seeing wage inflation now and that can't be tolerated.
My understanding is that the US has so much more debt now than we did in the 80s that a rate hike of that magnitude would cause too much harm for the Fed to stomach.
> the US has so much more debt now than we did in the 80s that a rate hike of that magnitude would cause too much harm for the Fed to stomach
The Treasury pays interest on government debt. The Fed does not. Raising rates causes the Fed no harm other than (a) risking recession and (b) creating accounting losses idiots politicise. (The same way the Fed's accounting gains as it lowered rates are a useful fiction.)
When the Fed raises rates, it increases the rate the U.S. pays on new debt. Over time the U.S. government's interest outlay would thus rise. But we're nowhere near that being an issue. To the degree it would be an issue, it would manifest as inflation. The specter rates are being raised to fight.
The Treasury pays interest on government debt. The Fed does not. Raising rates causes the Fed no harm other than (a) risking recession and (b) creating accounting losses idiots politicise. (The same way the Fed's accounting gains as it lowered rates are a useful fiction.)
When the Fed raises rates, it increases the rate the U.S. pays on new debt. Over time the U.S. government's interest outlay would thus rise. But we're nowhere near that being an issue. To the degree it would be an issue, it would manifest as inflation. The specter rates are being raised to fight.
> Raising rates causes the Fed no harm other than (a) risking recession and (b) creating accounting losses idiots politicise
There is C: politics. It is believed that the Fed is directly responsible for Carter losing to Reagan. (though it isn't clear how the election would have gone otherwise, it wouldn't have been the landslide it was) The Fed also reports to congressional hearings.
There is C: politics. It is believed that the Fed is directly responsible for Carter losing to Reagan. (though it isn't clear how the election would have gone otherwise, it wouldn't have been the landslide it was) The Fed also reports to congressional hearings.
The fed pays interest on reserves and reverse repo. But it can just create deferred assets to pay for them… https://fedguy.com/fed-balance-sheet-faqs/
Inflation was high for quite a number of years before volker, they kept raising rates but then backed off from the economic pain and never succeeded in killing it completely. Volker came in and raised rates to the point where inflation was done.
The point being, they can try to kill it first time, or maybe they have to raise even higher later on which would be even worse for the problem you're talking about.
Also, they're on record as being fully aware of this.
The point being, they can try to kill it first time, or maybe they have to raise even higher later on which would be even worse for the problem you're talking about.
Also, they're on record as being fully aware of this.
Too much harm for the Federal government to stomach when interest payments surpass tax revenue. Either tax hikes or spending cuts would have to occur, or go further into debt to pay interest on debt (???)
Harm to who? Aren’t rate hikes beneficial to entities that have a lot of debt?
Harm to the politicians that like to spend borrowed money. [Edit: Remember that the US debt is constantly being refinanced at new (now higher) rates] Also remember that debt reflects money ALREADY spent and which therefore provides no additional value, while the ongoing cost of servicing that debt will climb and capture an increasing proportion of the national budget. If all goes well, this will result in reduced spending - but that's not likely. More likely is that this leads to EVEN MORE borrowing, which in turn causes MORE inflation. If we don't get a grip, this is what ultimately ends in a hyper-inflation death spiral as we've seen in other countries over the last 100 years. As the pie shrinks, the govt tries to preserve the absolute size of it's slice by spending more, which causes the pie to shrink still further.
To US government. It holds a lot of short term debt that it continuously rolls over into new short term debt. If the rate go up, new short term debt will become much more expensive to service.
Here is a simple example with made up (but not completely off base) figures. Assume US government has debt amounting to 100% GDP. Assume also that it collects taxes amounting to 20% of GDP. If rates are 2%, then interest payments are 2% of GDP, which is 10% of the budget. Now, if bond rates go to, say, 6% (current mortgage rates), then interest payments are 6% of GDP, which is now actually 30% of the budget.
Basically, at high debt-to-GDP ratio, small changes in the interest rates cause huge swings in how much budget is spent on interest payments. This money has to come from somewhere, and more debt is only a short term answer.
Here is a simple example with made up (but not completely off base) figures. Assume US government has debt amounting to 100% GDP. Assume also that it collects taxes amounting to 20% of GDP. If rates are 2%, then interest payments are 2% of GDP, which is 10% of the budget. Now, if bond rates go to, say, 6% (current mortgage rates), then interest payments are 6% of GDP, which is now actually 30% of the budget.
Basically, at high debt-to-GDP ratio, small changes in the interest rates cause huge swings in how much budget is spent on interest payments. This money has to come from somewhere, and more debt is only a short term answer.
I’m no expert here, so someone by all means correct me, but my understanding is that the fed rate correlates to the rate of interest the government has to pay on its debts. The higher the rate, the larger the chance that the government defaults which for the US would be catastrophic.
https://www.crfb.org/blogs/just-how-big-are-federal-interest...
> According to the Congressional Budget Office's (CBO) latest baseline, the federal government will spend $400 billion on interest payments on the national debt this fiscal year (FY). That's equivalent to just over 8 percent of all federal revenue collections and roughly $3,055 per household ... Interest costs and the national debt could be even higher if interest rates continue their upward trajectory and outperform CBO's latest economic forecast. Each one percentage point increase in interest rates would increase FY 2022 interest spending by $38 billion at today's debt levels.
As the interest rate increases, those payments increase also - this is money that is spent and doesn't "get us anything more" - it's just maintaining the current debt load. The site linked is obviously arguing for "spend less money" but the math checks out, and if the debt never goes down interest rates can have a major effect. (Now sure, some/most of this debt is paid to the government itself.)
> According to the Congressional Budget Office's (CBO) latest baseline, the federal government will spend $400 billion on interest payments on the national debt this fiscal year (FY). That's equivalent to just over 8 percent of all federal revenue collections and roughly $3,055 per household ... Interest costs and the national debt could be even higher if interest rates continue their upward trajectory and outperform CBO's latest economic forecast. Each one percentage point increase in interest rates would increase FY 2022 interest spending by $38 billion at today's debt levels.
As the interest rate increases, those payments increase also - this is money that is spent and doesn't "get us anything more" - it's just maintaining the current debt load. The site linked is obviously arguing for "spend less money" but the math checks out, and if the debt never goes down interest rates can have a major effect. (Now sure, some/most of this debt is paid to the government itself.)
Wow thanks putting a number on it. I knew it was high but holy cow is that a lot of money for as you say, nothing more.
To be fair, there's an argument that it's effectively the same as the government printing 400 billion a year, or something (this is MMT). I don't fully follow the argument and honestly it's not something really actionable by me. Personally it's all too complicated for me to think about and any analogies are going to fall short in horrible and painful ways.
@mrgalaxy So long as the US onshore Dollar and offshore 'petrodollar' remain as the reserve currency of the planet default is unlikely as they essentially control all our planets money and can print more and more, or reduce money supply. It is good to be king.
The US can't be forced to default. They can literally print money.
The US rolls over debt by paying off debt with new debt. So interest rate hikes would eventually lead to a hike in interest payments on bonds.
A sharp increase in bond interest payments set off the Greek crisis.
A sharp increase in bond interest payments set off the Greek crisis.
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Not if they can't pay it off, and need to roll over said debt, which is the case with the national debt.
Inflation is beneficial to entities with a lot of debt. Lowers what they have to pay back in real dollars.
Not if it's variable debt, like credit card interest.
After the election...
Powell is Trump's pick (1st term) AND Biden's pick (2nd term) with like 89 votes from the Senate.
For better or worse, the man and his circumstances has proven himself to be apolitical.
For better or worse, the man and his circumstances has proven himself to be apolitical.
He's done fairly well at navigating the political landscape I would say that he's smart enough to know that if he does anything strongly before the election it will be scrutinized heavily as political thus he will wait until after the election if he deems it necessary to make more drastic measures.
there is a whole generation of SWE who will face the reckoning that $400K total comp with RSU is far from the norm
Something dramatic is going to have to happen for SWE salaries to drop significantly. I have a feeling if SWEs take a 20%+ haircut on salaries things are going to be absolutely abysmal for people in other roles.
Many of us have already dealt with a 20% haircut, at least on the RSU portion of compensation.
* Higher cost of borrowing is putting pressure on growth companies that relied on cheap capital
* Economic downturn makes it harder to do business and lowers stock prices, which makes up a big part of any 400K SWE package
* Tech companies can allow RSU grants to expire rather than implementing formal paycuts. Whereas companies in other sectors might lay off 5% of the workforce before giving everyone a 5% paycut, we may see a different trend in tech.
* Higher cost of borrowing is putting pressure on growth companies that relied on cheap capital
* Economic downturn makes it harder to do business and lowers stock prices, which makes up a big part of any 400K SWE package
* Tech companies can allow RSU grants to expire rather than implementing formal paycuts. Whereas companies in other sectors might lay off 5% of the workforce before giving everyone a 5% paycut, we may see a different trend in tech.
My RSUs are down 70% from their post IPO peak.
question: is it illegal to setup a hedging instrument for this sort of thing?
Illegal? Not sure. I'm forbidden from shorting our own stock by internal policy.
It's illegal for officers and directors to short their own stock. It's not technically illegal for any other employee.
That being said I've never seen a company that allows it in their company policy. Every company I've seen forbids it to eliminate the appearance of unethical behavior.
That being said I've never seen a company that allows it in their company policy. Every company I've seen forbids it to eliminate the appearance of unethical behavior.
> I have a feeling if SWEs take a 20%+ haircut on salaries things are going to be absolutely abysmal for people in other roles.
Other roles have more direct analogues in other industries that keep compensation stickier. Eg, corporate finance/strategy/legal/etc can just transition industries pretty cleanly, with similar comp. They get paid less in the good times, true, but if the downturn is concentrated in tech, other companies would still be happy to have them.
Other roles have more direct analogues in other industries that keep compensation stickier. Eg, corporate finance/strategy/legal/etc can just transition industries pretty cleanly, with similar comp. They get paid less in the good times, true, but if the downturn is concentrated in tech, other companies would still be happy to have them.
What time scale are you thinking of? Short-term 20% haircut seems inevitable compared to 1-2 years ago with the caveat that nothing may be forcing you to sell any vested RSUs.
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I was wondering why they don't move the interest rate up continuously over a period instead of flat jumps. Is the shock of jumping up in one day useful economically? That would be slightly confusing, because it seems like I'm always reading that the market has already priced in changes to the interest rate by the time the announcement comes out.
They actually do. The announcement is them saying what they target the rise to be. It may be slightly more or slightly less and it's not instantaneous. Direct lending to banks is an instrument available, but most of their influence comes from open market operations, which only indirectly impacts prevailing interest rates and consists of more or less continuous buying and selling of existing debt, which doesn't all happen on the day of the announcement.
They still need to price contracts between jumps. If they move it "continuously," then the rate at any given moment is difficult to determine. Hopefully no one is using javascript to calculate it!
It's a coarse enough instrument that changing it only a few times a year still spreads the effect out over the whole year and even if it was continuous announcing a change in the rate of change will have exactly the same effect.
10 year treasury bonds looking good or corporate bonds. You are locking in a 3-4% rate for the next decade. It will not take much to force interest rates and inflation back down again...another pandemic, recession, crisis, etc. Yes, 10-year bonds have a negative real yield now, but it seems unlikely inflation will stay at 5-8%/year for the next decade.
The problem with cash is the ONLY way you are getting that 3% yield is if:
1. you stay in cash for a whole year , 2. and the fed does not lower rates again
This is why bond ETFs have so much lag and are not as good. They still have old bonds on their book which pay worse, so you are getting maybe a 2% yield instead of 3%. You are better off just buying bonds from the treasury and getting the full amount.
The problem with cash is the ONLY way you are getting that 3% yield is if:
1. you stay in cash for a whole year , 2. and the fed does not lower rates again
This is why bond ETFs have so much lag and are not as good. They still have old bonds on their book which pay worse, so you are getting maybe a 2% yield instead of 3%. You are better off just buying bonds from the treasury and getting the full amount.
The “old bonds on their book” will decline in value if rates rise.
Consequently the ETF will be cheaper by exactly the right amount to keep the income/coupon component of its return in line with buying an equivalent basket of US treasury bonds directly.
Consequently the ETF will be cheaper by exactly the right amount to keep the income/coupon component of its return in line with buying an equivalent basket of US treasury bonds directly.
> 10 year treasury bonds looking good or corporate bonds. You are locking in a 3-4% rate for the next decade.
I don't follow, inflation is way higher than 3-4% all over the globe. How are bonds looking good? Do you mean going for bonds as a safe option that will lose less than cash?
I don't follow, inflation is way higher than 3-4% all over the globe. How are bonds looking good? Do you mean going for bonds as a safe option that will lose less than cash?
Anyone else notice Powell mentioned multiple times that they're trying to weaken the labor market? (and by extension the ability of workers to negotiate good wages, good conditions)
Anyone know why?
Anyone know why?
One reason is that inflation has a lot of inertia, because inflationary expectations drive more inflation.
A strong labor market drives up wages. When not matched by GDP growth, those wages increase costs, which cause workers to demand higher wages to keep up with those costs, and so on.
The cycle needs to be broken even if there is short term pain for workers.
A strong labor market drives up wages. When not matched by GDP growth, those wages increase costs, which cause workers to demand higher wages to keep up with those costs, and so on.
The cycle needs to be broken even if there is short term pain for workers.
But what about the decades of wages not keeping up with productivity (proxy for GDP Growth)? Could this simply be seen as workers finally getting their due?
Workers making good wages increases demand on goods that are already in high demand.
> Workers making good wages
Wouldn't that be a baseline value of a society? It makes me think that the price increases that are happening is simply a return to norms after we had like 50yrs of productivity increases w/o increasing wages -- meaning prices were actually suppressed.
Wouldn't that be a baseline value of a society? It makes me think that the price increases that are happening is simply a return to norms after we had like 50yrs of productivity increases w/o increasing wages -- meaning prices were actually suppressed.
I don't think that's the way it works in capitalism, unless it's part of the government's goals. Right now it isn't. The goal is to stop inflation, not make your or my life better. That was never the role of the Fed, that is for the legislature to decide with policy
I am seeing companies really start to feel these rate hikes and the corresponding market moves. I can’t tell where we are in the correction but it is definitely not at the start. I just hope it’s somewhere close to the middle.
I wonder what behavioral effects will be as a result of this. I’ve definitely become more conscious of eating out to cut cost. I hear Americans want to travel after being muzzled for 2 years. I am looking for more economic places to live versus cushy Palo Alto. I think until houses adjust to where they’re supposed to be (a la pre 2020 projected growth rates) vs the spike from pandemic Will be difficult for me to pull the trigger and buy a house
I haven't seen any reporting on how the recent and huge amounts of QE might factor into all of this. In my primate mind, wouldn't ongoing QE curb the impact of rising interest rates on inflation?
Given your other comment, when you say "ongoing," what you mean is some of the assets they purchased remain on the Fed's books. If they don't continue buying, the fact that they still hold some of it doesn't have any further impact on rates on debt being offered in the future. They're doing more selling than buying at this point, which drives rates up. You don't need to dump everything at once to change the direction of movement. Think of like the strategic oil reserves. Selling any of it drives prices down. You don't need to sell literally all of it.
QE was ended in March, and we're in full QT now.
Ended; but there's still about $8T on the books of past QE right?
https://www.businessinsider.com/personal-finance/quantitativ...
https://www.businessinsider.com/personal-finance/quantitativ...
> there's still about $8T on the books of past QE right?
Yes, about $8.8tn [1]. The Fed is running them off at about $60n a month [2]. (The Fed's optimal balance sheet is estimated to be around $4tn [3].)
The elephant in the room is the Fed's mortgages [4][5]. Those will have to start being sold soon, since rising rates mean mortgagers aren't refinancing and thus a run-off strategy doesn't reduce holdings.
[1] https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
[2] https://www.federalreserve.gov/newsevents/pressreleases/mone...
[3] https://advisors.vanguard.com/insights/article/thefedsplanto...
[4] https://www.ft.com/content/1a2e829e-de82-4083-abcb-ceeb46a45...
[5] https://fred.stlouisfed.org/series/WSHOMCB
Yes, about $8.8tn [1]. The Fed is running them off at about $60n a month [2]. (The Fed's optimal balance sheet is estimated to be around $4tn [3].)
The elephant in the room is the Fed's mortgages [4][5]. Those will have to start being sold soon, since rising rates mean mortgagers aren't refinancing and thus a run-off strategy doesn't reduce holdings.
[1] https://www.federalreserve.gov/monetarypolicy/bst_recenttren...
[2] https://www.federalreserve.gov/newsevents/pressreleases/mone...
[3] https://advisors.vanguard.com/insights/article/thefedsplanto...
[4] https://www.ft.com/content/1a2e829e-de82-4083-abcb-ceeb46a45...
[5] https://fred.stlouisfed.org/series/WSHOMCB
The sparks will really fly when they begin to require FNMA and FHLMC conforming loans be assumable.
I guess you meant QT and not QE.
@dang
How is this entry about to leave the front page at 105 points and 154 comments and the CNBC one at 36 p 14 c rising? This is ridiculous. I'm not accusing of malice, but something needs fixing.
How is this entry about to leave the front page at 105 points and 154 comments and the CNBC one at 36 p 14 c rising? This is ridiculous. I'm not accusing of malice, but something needs fixing.
Just more regular people about to be laid off and suffer.
Are rates for investment companies also affected by this? Like if a company wants to buy 30-50 houses to rent out, do they borrow at a similar rate?
Almost all interest rates are affected by this, because almost all of them are "federal rate + X" - so if the fed rate floats up, so does the amount this company would pay.
> Are rates for investment companies also affected by this?
Yes
> Like if a company wants to buy 30-50 houses to rent out, do they borrow at a similar rate? [... to regular mortgage borrowers]
Typically no
Yes
> Like if a company wants to buy 30-50 houses to rent out, do they borrow at a similar rate? [... to regular mortgage borrowers]
Typically no
And to expand on that, they usually borrow at a much higher rate than regular mortgage borrows.
Ow, my 3x leveraged ETFs aren't looking so good.
how many people are buying these? It seems like the popularity of 3x funds has exploded over the past 2 years.
You would be surprised how many brand-new investors through their money in 3x levered ETFs and/or way out-of-the-money options and were right 3/4ths of time on accident. High school students were writing Hedge Fund managers asking for jobs as they did ridiculously well through blind luck.
Same here. Luckily, I pulled out of pretty much all of them in February when Putin invaded and I saw the writing on the wall.
This wont help inflation, interest rates are still effectively negative when inflation is considered.
What it will do is rise i interest payments on the US sovereign debt very significantly.
The US has two options, as far as I can tell.
1. Slash govt. spending (entitlements and defense) and rise taxes on the laptop class (that's us folks!)
2. Accept structural inflation and high interest rates.
The Dollar dominance is coming to an end, we weaponized it too much, so option 3, exporting inflation is out.
Politically 2 is easier, but in the long run disastrous.
What it will do is rise i interest payments on the US sovereign debt very significantly.
The US has two options, as far as I can tell.
1. Slash govt. spending (entitlements and defense) and rise taxes on the laptop class (that's us folks!)
2. Accept structural inflation and high interest rates.
The Dollar dominance is coming to an end, we weaponized it too much, so option 3, exporting inflation is out.
Politically 2 is easier, but in the long run disastrous.
I am not even sure (1) is a practical option. Remember we have increased instability due to the Russo-Ukraine war. Thus, the U.S. Department of Defense is already getting and spending more money all while more money is spent on Ukraine aid -- which ends up in U.S. Defense industry hands. Entitlements not going to change, they should have but we are post pandemic, a lot of things are messy and we are in a midterm election season. And finally taxing the laptop class more might be politically taboo -- see midterm/future election note -- and improbable as a lot of shuffling has been taking place and over taxing might/will scar "unicorns and the VC" system way too much in the long run. Recall, you can't tax capital gains if there are no gains, but huge losses. And the laptop class taxation is based on capital gains I'd say.
Option (3) is already in effect indirectly, due to inflation being world-wide, and Europe being hit much harder due to the conflict.
Like every past pandemic this one is going to hit the economy like a sledgehammer... We failed, once again.
Option (3) is already in effect indirectly, due to inflation being world-wide, and Europe being hit much harder due to the conflict.
Like every past pandemic this one is going to hit the economy like a sledgehammer... We failed, once again.
The dollar survived the Great Depression, Bretton Woods, the oil supply shocks, the abolition of the gold standard, political games of brinkmanship over the debt ceiling, the War on Terror, the Great Financial Crisis, the Volcker shock, and Covid.
The dollar's supremacy isn't going anywhere.
The dollar's supremacy isn't going anywhere.
Agree if anything this will help the dollar supremacy and hurt the rest of the world.
Wasn't it Bretton Woods that _established_ USD dominance?
Raising interest rates makes the dollar more attractive relative to other currencies, because receiving more interest is better than receiving less.
Would appreciate some sources for these claims.
Ken Klippenstein's great report over at The Intercept that even the Fed’s own research warns that continuous interest rate increases could trigger a “deep recession”. https://theintercept.com/2022/09/09/recession-federal-reserv...
I can predict that next time around the Fed is going to trigger a full 100 percentage rate increase thus triggering a much deeper recession thus more layoffs and job losses as a result. It's by design really since even the Fed wants to get wages down and shift power back to the employer.
Buckle up.
I can predict that next time around the Fed is going to trigger a full 100 percentage rate increase thus triggering a much deeper recession thus more layoffs and job losses as a result. It's by design really since even the Fed wants to get wages down and shift power back to the employer.
Buckle up.