These rate rises are starting to feel political in the UK and US. There’s an element of strongman signalling, regardless of damage, to make up for the earlier mistake of not responding early enough.
The US markets are still well down, banks are failing, mortgages are extremely high.
Stop dishing out the pain guys, at least until all of the previous rate rises have played through The system.
> These rate rises are starting to feel political in the UK and US.
They are deeply political. The interest rates would have to be significantly higher, particularly in the UK, but actually going there would do other damage. So they are trying to go as high as possible, without losing support of the businesses.
If UK interest rates were at their non political, independant level (~ double their current level) - the survival of the UK as a going concern would be in jeopardy and the government would step in and make the rate setters a political no longer independent body.
The governement already spends 80bn on the interest bill each year (against a budget of ~1,000bn); despite 20 years of being able to issue debt at effectively 0%.
Naturally I have taken a few liberties with the theory - inflation +/- r* would be the correct rate for the economy. As a quick calculation, it wouldnt be unfair to say interest rate == inflation is a balanced monetary policy.
Oh yes, for sure! Speaking specifically about the US: Every POTUS (from both parties) during my lifetime has favored lower interest rates, cause jobs, "economy is strong" arguments - all means to look good during their term.
The Fed is now stuck in a really hard place - raise too much too fast and you get many more SVBs going belly up, posing a larger systemic risk, assuming we even "make it out of the woods". Pause / raise slowly, and you risk inflation running red hot, and people who are technically employed, live paycheck to paycheck start to rely on food banks to cover the rapid raise in cost of living - a tax on everybody.
The Fed is also fighting other dynamics like supply consequences of the Ukraine war, or energy crises, some of which are transitory, some are not. Still lots of uncertainty.
All this on top of a tug of (policy) war between an administration that favors handing out more packages, and the Fed's duty in achieving pricing stability. Can't see this ending well.
> Pause / raise slowly, and you risk inflation running red hot
The federal funds rate is such a blunt instrument. It's not clear to me that raising the rate is particularly effective in stopping inflation, which tends to be a complex phenomenon with multiple causes. As you say, there are "other dynamics".
> people who are technically employed, live paycheck to paycheck start to rely on food banks to cover the rapid raise in cost of living - a tax on everybody.
On the other hand, there are also people who lose their paychecks entirely due to rising interest rates. The Fed has been very public about the fact that they want to stop wage inflation in particular (which tends to lag behind inflation of other goods).
It's never been clear to me why it's a good idea to continually adjust the rate, as opposed to picking an ideal target rate and trying to keep it relatively stable permanently. It seems almost inevitable that the economy will go on a roller coaster with the fed turning the volume knob up and down. Chicken and egg problem, to mix my metaphors.
> It's never been clear to me why it's a good idea to continually adjust the rate, as opposed to picking an ideal target rate and trying to keep it relatively stable permanently.
That target rate depends on many things in the economy that the FED has no control over, so they adjust the knob as best they can predict, to stear the economy to their dual mandate.
They need to keep inflation low (around 2%) and employment high, but they don't control what the government does in terms of raising/cutting taxes, what world events do to supply, and production.
But you're right, it's a blunt knob to adjust when there are so many variables at play.
Price controls are an excellent way to quickly damage the economy in very visible ways, which makes it politically dangerous. Price controls don't happen in a vacuum and they tend to have adverse consequences.
The US healthcare system, as an example, was a direct unintended consequence of US government price controls. That was 80 years ago and the affects are still with us.
If you'd (somehow) lock the price for housing, there's less incentive for new housing to be built. If you put price controls on food there's a chance certain foods may become unprofitable to produce, leading to food shortages.
Price controls lead to shortages and subsidies lead to price increases. It's usually best just to leave stuff alone and let the market take care of it.
But does the market not also focus on profit and continuous expansion/consolidation? Clearly based on things like drug prices, egg prices, etc… profit is a “driving” factor, not “will this product sell.”
It’s very simple. Fed needs to stop printing / creating money.
High inflation has painful solutions. Pain from inflation is worse than basically any of the benefits from the extra spending government has done the last many years.
The answer is the Fed does its job when it can (stoking aggregate demand with cheap money, destroying it when credit expansion velocity exceeds certain metrics), and Congress enacts fiscal policy instead of being useless.
If you leave it all to the Fed, everything is a nail, with the hammer being the benchmark rate. Creating too much money is not great, but poorly targeted or no government fiscal policy is equally disastrous. No one party is at fault, the system requires fixing.
Half the point of raising rates like this is to signal to everyone that inflation is a priority and will be addressed, with the hope of killing off expectations of further inflation (which can be a feedback loop).
Ultimately none of the measures you mention are really relevant to inflation, as far as the Reserve would be concerned. CPI is.
The US probably has it the worst because they subsidise fixed 30y mortgages, which you pretty much can't get anywhere else on the planet because the terms of such are so insanely generous to the holder. These insulate a massive portion of the US population from immediate effects of rate rises, so the US likely has to hit harder than most other countries for the same effect on inflation.
I can’t read that, but one of the unique features of the “standard” US 30-year fixed rate mortgage is that there’s no penalty for early payoff. As a result, it’s easy to refinance when rates go down, which is almost certain to occur during the 30-year period. This capability is priced in to the rate.
The only way to really kill inflation is strongman signaling. The market has to believe you are willing to endure the pain and keep raising rates in order to kill inflation.
And the mistake earlier was basically propping up the world economy during covid. I don't know exactly what else they could've done?
I reckon we're about to enter an exciting new experiment where they combine nominally high interest rates with large amounts of money printing. The banking system is already under a lot of stress, so I expect they're preparing to unleash hitherto-unprecedented amounts of largess on anyone who looks important and has a bank account.
They don't have a lot of options at this point except word games where they explain it isn't a bailout, it is a Special Financial Operation. It isn't money printing, it is Quantitative Adjustments. This isn't central planning, this is just the only way grown men could imagine planning a financial system. The US isn't going to default, it'll just ... not pay back its debt in real terms and its creditors will be OK with that because what causes them worry is the word, not the fact their wealth just vanished.
I imagine the Fed with its shoes on fire (inflation). On the one hand, it's holding a fire extinguisher (raising rates). On the other hand, it's a holding a gun ready to shoot its own feet (pausing rates to help banks).
How much confidence do we have in the Fed? They failed to recognize earlier that printing so much would drastically increase inflation - even with all the data in the world.
Did they fail to recognize it, or merely judge that that outcome was better than the alternative or that they could turn it down before the inflation got out of hand?
It seems utterly obvious that a high level of money printing without a matching increase in supply of goods and services would eventually lead to a dramatic increase in inflation. It's less obvious exactly when that would start and when it would overshoot a comfortable range.
> On the one hand, it's holding a fire extinguisher (raising rates).
There’s a lot of discourse that questions I’d rate increases are the most effective tool to tame inflation. It may be the only tool the Fed has, however.
I’m confident the fed is aware of what its actions do, but they themselves admit they aren’t a political organization and the other parts of the government can made different decisions that have different consequences.
Traditionally, raising taxes or cutting government spending was another way to limit the money supply - and hence curb inflation.
The Fed is doing the best it can using monetary policy because the federal government is too fractured to have a cogent fiscal policy response. But fiscal tools probably would be useful to have in this environment.
We’ll see what happens when the now higher interest rate debt payments that we’re using to fund federal spending come due. Consumers aren’t the only ones that have gotten used to easy credit and cheap borrowing over the last 20 years.
> They failed to recognize earlier that printing so much would drastically increase inflation
There isn't yet a complete consensus on what exactly contributed to the inflation and to what extent. Many argue that supply-side shocks contributed more than demand-side.
What can the 'Fed' (reserve) do to fix the supply side? That requires good legislation and follow through on civic planning. We can't even get DST or NO-DST to pass even though stopping the time shift ride somewhere, for some even anywhere, seems like a no-brainer piece of legislation.
There's long been a supply side issue with housing.
It's also sold at the margin so if demand keeps increasing by say 5k people/yr and supply increases at 3k people/yr then prices go up way beyond 5/3.
Awfully weird for this inflation to be demand side when people got a ton of money (and spent it) and things didn't cost more and then _years_ later it did ... Like I could say inflation is going to occur people Biden ate a sandwich today and as long as it happens within the next 3 years I can just claim success?
Please stop with this. It was not the Fed's actions that caused a high CPI. They did the exact same thing post-GFC and nothing happened despite much tearing of garments:
> We believe the Federal Reserve's large-scale asset purchase plan (so-called "quantitative easing") should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment.
The difference this time was a huge geopolitical event which drove up prices (a huge driver of the CPI was energy prices: remember the GOP going on and on about gas prices?), a lot of COVID assistance, post-COVID stimulus, and supply chain issues:
> Inflation has remained at levels well above the Federal Reserve’s inflation goal of 2% for over a year. Separating the underlying data from the personal consumption expenditures price index into supply- versus demand-driven categories reveals that supply factors explain about half of the run-up in current inflation levels. Demand factors are responsible for about one-third, with the remainder resulting from ambiguous factors. While supply disruptions are widely expected to ease this year, this outcome is highly uncertain.
The COVID measure were one-shot deals and were, in fact, predicted to raise inflation for a short (1-2 year) period, analogously to sudden Korean War spending (versus the continued spending for Vietnam):
The main thing they failed to predict was the invasion of Ukraine, which added to the other three conditions. Sure; perhaps the Fed could have started tightening sooner.
But what is the counter-factual of the last 2-3 years? No COVID assistance measure so people have no money when things were on lockdown? No help in getting the economy started post-COVID? What would have the (un)employment rate been? Does anyone remember the long post-GFC slog to get everyone back to work (because the GOP wouldn't give Obama proper stimulus dollars)?
I think it was some Canadian finance mister, who said some months ago (sorry no reference, it was in some economic forum panel some month(s) ago), my wording from memory:
"We in West cannot control economy and inflation, what we can control is to go on with helping Ukraine, so we will do that."
High inflation is maybe a sign that war is being lost.
If he'd said "we cannot control the weather, what we can control is helping Ukraine", would a subsequent rainy weekend also maybe be a sign that the war is being lost?
Sounds like a bit of a cop out. Governments certainly can control all of the above, but it means making significant adjustments to either spending or taxation, both of which tend to be unpopular changes.
The war in Ukraine will turn into a rounding error as Russian gas is replaced by alternatives.
Our ministers are intellectually bankrupt and their statements should not be taken at face value. Read between the lines and hope to decipher what they really mean.
The Federal Reserve is supposed to supervise and regulate banks though. It clearly failed there. (As did Congress, of course. Plenty of governmental blame to go around.)
I understand that even the safe bet is under water now, but that's a poor strategy to expect that for sure those bonds were safe. Is this true: any hike in interest rates since you bought the bond is usually bad? And they were bottomed out. Bunch of banks bought a bunch of super low interest bonds that can't even keep up with inflation.
Increasing the interest rate is supposed to fight inflation.
I often wonder if that really works.
When the risk-free rate rises, doesn't that mean the opposite? That _more_ money will be printed?
When the government says "You give me $100 and I'll give you back more later" - where is this "more" coming from? Isn't it just more debt that will be paid back with more printed money?
You can look at Turkey, which has chosen to fight inflation by lowering interest rates. Turkey’s president is an autocrat who can make this kind of decision unilaterally and his economic beliefs run counter to the mainstream, so it makes for a fascinating experiment. He’s been lowering rates for two years, from 18% to 8.5%.
The results so far seem to support the economist orthodoxy: inflation in Turkey has ran up to 80% compared to a historical average of about 20% (which was roughly in line with the interest rate when Erdogan started his rate-decrease project.)
I'm certainly not any kind of expert on Turkey's economy. I'll just link to graphs that show the effects, someone smarter can debate the cause and effect.
Turkey has also been spending its foreign currency reserves to prop up the lira. They've experimented with extraordinary measures like a government guarantee to protect Turkish account holders against currency depreciation, in an effort to make people keep liras in banks rather than hard currency:
The M2 money supply in Turkish liras is climbing,
but not in the same proportion as the rate cuts and inflation
Not? It looks like the money supply doubled over the last 12 months.
Does it really need an expert on Turkey's economy to see a relation between the doubling of an asset and the asset being worth half as much afterwards?
There are many other factors like the foreign exchange reserves of Turkey and its commercial banks, which have been depleting.
Consider a case where a Turkish bank held two billion euros in 2021. They exchange half of it for liras in 2022 and receive N billion liras. A year later and after 80% inflation, they exchange the other half for liras and receive 1.8*N billion liras. That's not the government printing money to fund its spending, yet the money supply is increasing just like you'd see on the graph.
Like I wrote in my previous reply, Turkey has a unique program where it guarantees local currency deposits against hard currency exchange rate losses. That's meant to attract deposits and will obviously increase the money supply when locals trade their dollars/euros for liras — but it's not exactly "money printing", rather a completely new layer of risk for the central bank (and the losses may have to be offset by printing money eventually, but importantly that wouldn't show up yet in the graph we're looking at).
The Turkish central bank provides hard currency liquidity. It's absolutely vital for the economy, as import and export businesses in Turkey can't use the lira for most of their operations because foreign companies don't want that kind of emerging market currency risk.
The Turkish lira is free floating, so the central bank buys and sells liras at market rates. And seems like they're getting desperate to make sure foreign currency stays in the central bank:
"The request comes after commercial banks wired a net $2.3 billion to deposit accounts abroad in the first six weeks of the year, one of the people said, asking not to be named because the information is confidential. Hard-currency outflows are hampering efforts to keep the lira stable and inflation in check in the run-up to elections slated for May.
"While there are no regulations preventing banks from wiring capital to their correspondent banks abroad, Turkish officials have said that they want free cash kept in the monetary authority’s coffers."
So, a Turkish business sells a boatload of plums to Germany and gets paid in euros. The euros are wired from Germany to a Turkish bank. The bank's accounts are held in liras, so the business can't keep the euros directly. Instead the bank deposits the euros with the central bank and gets liras at market rate. The central bank now has more hard currency that Turkey's government might eventually use to pay for things like buying fighter jets (or whatever in the budget that's not domestically produced).
The plum business owner isn't very happy about holding liras in his bank account though, because he knows they might be worth 50% less in a year. So he immediately spends the money on things his business needs, paying a bit more than he did last time, just to ensure he can get the products... And that's how local inflation is being fed even by a seemingly positive thing like exporting plums. Government spending wasn't a factor here. But low local interest rate is a factor because lowering the costs of loans enables the plum business owner to spend more liras.
There are still those that take a loan, they will need to pay the higher interest. As long as there is a balance there will not need to be money printed.
My understanding is that increasing the interest rate causes capital to be more likely to seek low-risk guaranteed returns. The effect of this is to disincentivize investments and economic activity in general, as capital is more likely to be "parked" in risk-free debt, rather than seeking other ways of reaching high yield.
The unintuitive aspect of it is how inflation could reach 2% when capital has a guaranteed, risk-free way of generating 5%+ yield. But I suppose that could be explained by examining the growing economic inequality of the past 30+ years.
But the "high yield" investments are a zero-sum game. They don't create new money. If you invest in a company and the company is successful, your return is not printed. It comes from the pockets of the companies customers.
The risk-free returns on government bonds are risk free because the government never goes bankrupt. Because it simply prints the money it needs.
When you start a company and a vc gives you a million dollars at a $10 million valuation, 1 million is real, the other 9 just got printed.
When you do labor, you print money. When you take out a loan and commit your future labor to paying interest, you are printing money (converting labor to money)
There is always two sides to money.
The fed pays government workers, the other side is the worker’s labor. Fed buys bonds, the other side is the bond. Fed sells a bond, it destroys the money it receives back. fed buys gold, the other side is the gold. the other side is as much responsible for the money creation as the fed. Fed doesn’t unilaterally create money.
> When the government says "You give me $100 and I'll give you back more later"
No it's the other way around. The FED rate is the rate for which the FED will lend you money. The government borrows money by writing out government bonds, which' yield (rate) is determined by the market.
Every time the FED lends someone money, it basically prints it. Higher interest rates will cause fewer people to borrow money -> less money is printed -> inflation goes down. At least that's how it works in theory.
The theory completes ignores the fact that inflation is driven by two things: external supply shocks and corporate profiteering. There's some catch-up from wage inflation later, but it's a reaction to higher prices not a driver of them.
Tinkering with the money supply is like repainting your house when it's on fire. If your house is unstable it's not because it's the wrong colour. It's because the foundations need underpinning and perhaps a redesign.
Does this rate not also cause personal mortgages to rise, due to the increase? This effects monthly payments, on already agreed contracts, which makes homeowners struggle, no?
In the US almost all mortgages are fixed rate, so the monthly payments don't change. The interest rate does not change for the life of the mortgage, often 30 years. Because a mortgage can be refinanced, this causes a downward ratchet on interest rates for mortgages over time. This is one of the ways in which a mortgage is a hedge against inflation and rising costs. There are tens of millions of Americans with a mortgage rate in the 2.5-3.5% range because the mortgages pre-date the current rise in interest rates.
What this does impact is the ability of people to move houses, since a new mortgage would be priced to current market conditions.
No, this is not correct. The term "Fed Rate" is not correct or meaningful either. There are two different things - the Fed Funds Rate and the Discount Rate(also known as the Discount Window.) The Fed Funds Rate is "the rate" being discussed when the Fed raises interest rates[1][2]. The Fed Funds Rate is the interest rates banks charge each other to borrow money overnight to meet their Federal Reserve requirements. When it becomes more expensive for banks to borrow money from each other to meet their overnight Federal Reserve requirements it makes credit more expensive for both the banks and the consumers of a bank's loan products.
Banks can also borrow directly from the Federal Reserve via a facility called the discount window or Fed Discount rate[1]. Banks for a long time have avoided borrowing directly from the Fed as it has had something of stigma attached to it.[3] That has changed recently however(2007-2008.) The Discount Rate is always more than the Fed Funds Rate.
>"Every time the FED lends someone money, it basically prints it."
This is not correct either. The Fed maintains a balance sheet with assets and liabilities similar to a corporation [4]. One of those assets is money they have lent to other financial institutions. They do this by crediting or debiting the bank's account at the Fed. You seem to be confusing the Discount Rate with Quantitative Easing.
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[ 4.1 ms ] story [ 154 ms ] threadThe US markets are still well down, banks are failing, mortgages are extremely high.
Stop dishing out the pain guys, at least until all of the previous rate rises have played through The system.
They are deeply political. The interest rates would have to be significantly higher, particularly in the UK, but actually going there would do other damage. So they are trying to go as high as possible, without losing support of the businesses.
The governement already spends 80bn on the interest bill each year (against a budget of ~1,000bn); despite 20 years of being able to issue debt at effectively 0%.
https://en.wikipedia.org/wiki/Neutral_rate_of_interest (also known as r*)
Naturally I have taken a few liberties with the theory - inflation +/- r* would be the correct rate for the economy. As a quick calculation, it wouldnt be unfair to say interest rate == inflation is a balanced monetary policy.
The Fed is now stuck in a really hard place - raise too much too fast and you get many more SVBs going belly up, posing a larger systemic risk, assuming we even "make it out of the woods". Pause / raise slowly, and you risk inflation running red hot, and people who are technically employed, live paycheck to paycheck start to rely on food banks to cover the rapid raise in cost of living - a tax on everybody.
The Fed is also fighting other dynamics like supply consequences of the Ukraine war, or energy crises, some of which are transitory, some are not. Still lots of uncertainty.
All this on top of a tug of (policy) war between an administration that favors handing out more packages, and the Fed's duty in achieving pricing stability. Can't see this ending well.
The federal funds rate is such a blunt instrument. It's not clear to me that raising the rate is particularly effective in stopping inflation, which tends to be a complex phenomenon with multiple causes. As you say, there are "other dynamics".
> people who are technically employed, live paycheck to paycheck start to rely on food banks to cover the rapid raise in cost of living - a tax on everybody.
On the other hand, there are also people who lose their paychecks entirely due to rising interest rates. The Fed has been very public about the fact that they want to stop wage inflation in particular (which tends to lag behind inflation of other goods).
It's never been clear to me why it's a good idea to continually adjust the rate, as opposed to picking an ideal target rate and trying to keep it relatively stable permanently. It seems almost inevitable that the economy will go on a roller coaster with the fed turning the volume knob up and down. Chicken and egg problem, to mix my metaphors.
That target rate depends on many things in the economy that the FED has no control over, so they adjust the knob as best they can predict, to stear the economy to their dual mandate.
They need to keep inflation low (around 2%) and employment high, but they don't control what the government does in terms of raising/cutting taxes, what world events do to supply, and production.
But you're right, it's a blunt knob to adjust when there are so many variables at play.
To be clear, I was implicitly questioning this. Expecting the Fed to control inflation or employment seems unrealistic, even silly.
The US healthcare system, as an example, was a direct unintended consequence of US government price controls. That was 80 years ago and the affects are still with us.
Price controls lead to shortages and subsidies lead to price increases. It's usually best just to leave stuff alone and let the market take care of it.
If you leave it all to the Fed, everything is a nail, with the hammer being the benchmark rate. Creating too much money is not great, but poorly targeted or no government fiscal policy is equally disastrous. No one party is at fault, the system requires fixing.
Ultimately none of the measures you mention are really relevant to inflation, as far as the Reserve would be concerned. CPI is.
The US probably has it the worst because they subsidise fixed 30y mortgages, which you pretty much can't get anywhere else on the planet because the terms of such are so insanely generous to the holder. These insulate a massive portion of the US population from immediate effects of rate rises, so the US likely has to hit harder than most other countries for the same effect on inflation.
https://www.rabobank.nl/particulieren/hypotheek/hypotheekren...
5.44% right now, still well below the US rates (~7%).
And the mistake earlier was basically propping up the world economy during covid. I don't know exactly what else they could've done?
They don't have a lot of options at this point except word games where they explain it isn't a bailout, it is a Special Financial Operation. It isn't money printing, it is Quantitative Adjustments. This isn't central planning, this is just the only way grown men could imagine planning a financial system. The US isn't going to default, it'll just ... not pay back its debt in real terms and its creditors will be OK with that because what causes them worry is the word, not the fact their wealth just vanished.
Democracy is still possible in the US.
How much confidence do we have in the Fed? They failed to recognize earlier that printing so much would drastically increase inflation - even with all the data in the world.
It seems utterly obvious that a high level of money printing without a matching increase in supply of goods and services would eventually lead to a dramatic increase in inflation. It's less obvious exactly when that would start and when it would overshoot a comfortable range.
There’s a lot of discourse that questions I’d rate increases are the most effective tool to tame inflation. It may be the only tool the Fed has, however.
I’m confident the fed is aware of what its actions do, but they themselves admit they aren’t a political organization and the other parts of the government can made different decisions that have different consequences.
Traditionally, raising taxes or cutting government spending was another way to limit the money supply - and hence curb inflation.
The Fed is doing the best it can using monetary policy because the federal government is too fractured to have a cogent fiscal policy response. But fiscal tools probably would be useful to have in this environment.
We’ll see what happens when the now higher interest rate debt payments that we’re using to fund federal spending come due. Consumers aren’t the only ones that have gotten used to easy credit and cheap borrowing over the last 20 years.
There isn't yet a complete consensus on what exactly contributed to the inflation and to what extent. Many argue that supply-side shocks contributed more than demand-side.
Housing went up 50-100% within a year. Crypto popped to $3T+. S&P popped 100%.
All of this was led by demand side. There was no supply-side problem of Dogecoin or equities.
It's not unreasonable to expect that some of this also bled out to commodities and consumer goods.
It's also sold at the margin so if demand keeps increasing by say 5k people/yr and supply increases at 3k people/yr then prices go up way beyond 5/3.
Awfully weird for this inflation to be demand side when people got a ton of money (and spent it) and things didn't cost more and then _years_ later it did ... Like I could say inflation is going to occur people Biden ate a sandwich today and as long as it happens within the next 3 years I can just claim success?
Please stop with this. It was not the Fed's actions that caused a high CPI. They did the exact same thing post-GFC and nothing happened despite much tearing of garments:
> We believe the Federal Reserve's large-scale asset purchase plan (so-called "quantitative easing") should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment.
* https://economics21.org/html/open-letter-ben-bernanke-287.ht...
The difference this time was a huge geopolitical event which drove up prices (a huge driver of the CPI was energy prices: remember the GOP going on and on about gas prices?), a lot of COVID assistance, post-COVID stimulus, and supply chain issues:
> Inflation has remained at levels well above the Federal Reserve’s inflation goal of 2% for over a year. Separating the underlying data from the personal consumption expenditures price index into supply- versus demand-driven categories reveals that supply factors explain about half of the run-up in current inflation levels. Demand factors are responsible for about one-third, with the remainder resulting from ambiguous factors. While supply disruptions are widely expected to ease this year, this outcome is highly uncertain.
* https://www.frbsf.org/economic-research/publications/economi...
The COVID measure were one-shot deals and were, in fact, predicted to raise inflation for a short (1-2 year) period, analogously to sudden Korean War spending (versus the continued spending for Vietnam):
* https://www.piie.com/blogs/realtime-economic-issues-watch/in...
The main thing they failed to predict was the invasion of Ukraine, which added to the other three conditions. Sure; perhaps the Fed could have started tightening sooner.
But what is the counter-factual of the last 2-3 years? No COVID assistance measure so people have no money when things were on lockdown? No help in getting the economy started post-COVID? What would have the (un)employment rate been? Does anyone remember the long post-GFC slog to get everyone back to work (because the GOP wouldn't give Obama proper stimulus dollars)?
"We in West cannot control economy and inflation, what we can control is to go on with helping Ukraine, so we will do that."
High inflation is maybe a sign that war is being lost.
The war in Ukraine will turn into a rounding error as Russian gas is replaced by alternatives.
Cite: nothing
I often wonder if that really works.
When the risk-free rate rises, doesn't that mean the opposite? That _more_ money will be printed?
When the government says "You give me $100 and I'll give you back more later" - where is this "more" coming from? Isn't it just more debt that will be paid back with more printed money?
The results so far seem to support the economist orthodoxy: inflation in Turkey has ran up to 80% compared to a historical average of about 20% (which was roughly in line with the interest rate when Erdogan started his rate-decrease project.)
Over what time did the inflation rate go up from 20% to 80% and by what percentage did the money supply change during that time?
The rate cuts in Turkey began in September 2021:
https://tradingeconomics.com/turkey/interest-rate
The inflation rate soared from 20% to over 80% soon afterwards:
https://tradingeconomics.com/turkey/inflation-cpi
It's now stabilized to "only" 55% because of decreased energy price pressures, apparently.
The M2 money supply in Turkish liras is climbing, but not in the same proportion as the rate cuts and inflation:
https://tradingeconomics.com/turkey/money-supply-m2
Turkey has also been spending its foreign currency reserves to prop up the lira. They've experimented with extraordinary measures like a government guarantee to protect Turkish account holders against currency depreciation, in an effort to make people keep liras in banks rather than hard currency:
https://www.kcl.ac.uk/news/supporting-the-turkish-lira-asses...
So Erdogan's Turkey is an interesting basket case all around — one for future economics textbooks maybe.
Does it really need an expert on Turkey's economy to see a relation between the doubling of an asset and the asset being worth half as much afterwards?
Consider a case where a Turkish bank held two billion euros in 2021. They exchange half of it for liras in 2022 and receive N billion liras. A year later and after 80% inflation, they exchange the other half for liras and receive 1.8*N billion liras. That's not the government printing money to fund its spending, yet the money supply is increasing just like you'd see on the graph.
Like I wrote in my previous reply, Turkey has a unique program where it guarantees local currency deposits against hard currency exchange rate losses. That's meant to attract deposits and will obviously increase the money supply when locals trade their dollars/euros for liras — but it's not exactly "money printing", rather a completely new layer of risk for the central bank (and the losses may have to be offset by printing money eventually, but importantly that wouldn't show up yet in the graph we're looking at).
The Turkish lira is free floating, so the central bank buys and sells liras at market rates. And seems like they're getting desperate to make sure foreign currency stays in the central bank:
https://www.bloomberg.com/news/articles/2023-02-24/turkey-ce...
"The request comes after commercial banks wired a net $2.3 billion to deposit accounts abroad in the first six weeks of the year, one of the people said, asking not to be named because the information is confidential. Hard-currency outflows are hampering efforts to keep the lira stable and inflation in check in the run-up to elections slated for May.
"While there are no regulations preventing banks from wiring capital to their correspondent banks abroad, Turkish officials have said that they want free cash kept in the monetary authority’s coffers."
So, a Turkish business sells a boatload of plums to Germany and gets paid in euros. The euros are wired from Germany to a Turkish bank. The bank's accounts are held in liras, so the business can't keep the euros directly. Instead the bank deposits the euros with the central bank and gets liras at market rate. The central bank now has more hard currency that Turkey's government might eventually use to pay for things like buying fighter jets (or whatever in the budget that's not domestically produced).
The plum business owner isn't very happy about holding liras in his bank account though, because he knows they might be worth 50% less in a year. So he immediately spends the money on things his business needs, paying a bit more than he did last time, just to ensure he can get the products... And that's how local inflation is being fed even by a seemingly positive thing like exporting plums. Government spending wasn't a factor here. But low local interest rate is a factor because lowering the costs of loans enables the plum business owner to spend more liras.
You showed me a currency that lost 80% of its value while the amount of it was doubled. Not surprising. The plums don't change that.
The risk-free returns on government bonds are risk free because the government never goes bankrupt. Because it simply prints the money it needs.
When you do labor, you print money. When you take out a loan and commit your future labor to paying interest, you are printing money (converting labor to money)
I am referring to sum of money the FED has created.
No it's the other way around. The FED rate is the rate for which the FED will lend you money. The government borrows money by writing out government bonds, which' yield (rate) is determined by the market. Every time the FED lends someone money, it basically prints it. Higher interest rates will cause fewer people to borrow money -> less money is printed -> inflation goes down. At least that's how it works in theory.
Tinkering with the money supply is like repainting your house when it's on fire. If your house is unstable it's not because it's the wrong colour. It's because the foundations need underpinning and perhaps a redesign.
Citation please for this supposed "fact".
The accepted wisdom is that inflation is driven by the size of the money supply and the velocity of the money.
What this does impact is the ability of people to move houses, since a new mortgage would be priced to current market conditions.
Do you have a link where this process is described?
It is the commercial/retail banks that create money through credit:
> Most of the money in the economy is created, not by printing presses at the central bank, but by banks when they provide loans.
* https://www.bankofengland.co.uk/explainers/how-is-money-crea...
* https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
While central bank reserve rates do have impact, there are countries have have no reserve requirements (UK/England being one of them).
The transmission mechanism of monetary policy is… complicated:
* https://www.ecb.europa.eu/mopo/intro/transmission/html/index...
* https://www.chicagofed.org/publications/working-papers/2012/...
Banks can also borrow directly from the Federal Reserve via a facility called the discount window or Fed Discount rate[1]. Banks for a long time have avoided borrowing directly from the Fed as it has had something of stigma attached to it.[3] That has changed recently however(2007-2008.) The Discount Rate is always more than the Fed Funds Rate.
>"Every time the FED lends someone money, it basically prints it."
This is not correct either. The Fed maintains a balance sheet with assets and liabilities similar to a corporation [4]. One of those assets is money they have lent to other financial institutions. They do this by crediting or debiting the bank's account at the Fed. You seem to be confusing the Discount Rate with Quantitative Easing.
[1] https://www.investopedia.com/terms/f/federalfundsrate.asp
[2] https://www.investopedia.com/terms/f/federal_discount_rate.a...
[3] https://www.federalreserve.gov/econres/notes/feds-notes/stig...
[4] https://www.investopedia.com/terms/f/fed-balance-sheet.asp
Ask Volcker:
* https://en.wikipedia.org/wiki/Early_1980s_recession_in_the_U...
* https://en.wikipedia.org/wiki/Paul_Volcker#Chairman_of_the_F...
Money is destroyed when government sells treasuries.
If you buy treasuries you aren’t using it to buy goods and services.
When bank buys your debt, you spend the money on goods and services.