This whole interest rate hike exercise and its obvious effects on various markets has really made the economy seem fake to me. How can one government committee have so much arbitrary decision making power over how hundreds of millions conduct business in this country? It’s extremely demotivating.
> It's even more of a headscratcher when you realize that the Federal Reserve is not a government committee.
The Board of Governors of the Federal Reserve System is an executive branch agency whose Governors are appointed by the President and confirmed by the Senate, just like members of other executive branch boards, commissions, and committees... [0]
The Federal Reserve System itself is a weird public/private hybrid thing, but the System doesn’t set monetary policy, the Board does.
No bank is obligated to use the Fed system. Unless you want to process a Fed wire or ACH. Or you want FDIC insurance. Or you want to offer banking services to consumers. Or you want access ti the Fed window for short term liquidity.
But if you put those aside and somehow manage to get a bank charter, you could totally eschew the Fed.
Now if you do play in their ballpark you have to play by their rules. And a big one there is the rate that you’ll get on short term deposits. And given the scale it implicitly sets the pace for interbank rates as they have to directly compete with the Fed.
“No one is forcing you to buy bread from the government run nickel bread company, you are free to start your own company and charge whatever you like. If others choose to buy the government’s bread for a nickel, well, hey, that’s just the free market for you.”
I don’t think the (us) government is lending to the banks, it is already on close to trillion dollar deficit, if anything it is borrowing from banks.
“People” in my comment includes groups of people too (eg companies, governments). Shouldn’t one be able to set the price of borrowing, why we must have one party deciding for everyone else.
> I don’t think the (us) government is lending to the banks
Lending to banks is precisely what the Federal Reserve does.
> Shouldn’t one be able to set the price of borrowing, why we must have one party deciding for everyone else.
This is also already the case. If you want to take out a mortgage or a personal loan or a credit card, the interest rate is negotiated entirely between you and the lender (the government has no say in dictating that rate).
The reason Fed interest rates affect your interest rates is that if banks have to pay more interest to borrow from the Fed, they are willing to offer consumers more money for their deposits, and are also going to charge more for money they lend out (since they still need to make a profit on it).
This is part of the reason for recent bank failures: if you're a bank and you offer depositors 1% on their deposits to go and make long-term investments at 2%, you'll make that 1% difference as profit.
If other banks suddenly start offering depositors 3% (due to increased bank-borrowing rates), you're going to either lose depositors to the much better interest rates at other banks or you're going to have to take a loss on those 2%-investments you made, offload them, and make other investments at a higher interest rate.
In all of this, the only hand the Fed had in things is saying "We're charging banks this much interest on the money we lend them"
The common answer to this question is that the base rate could be set by some free-market themed mechanism, where the price (aka base rate) depends on the balance of supply and demand for loans, instead of the current status quo of centrally-planned rates.
When shocks his the system, the supply of loans collapses and the demand for loans increases. In good times the supply of money would far exceed the demand. Rates would go up in recessions and down in booms making the bust nearly impossible to exit and the booms into a week long party fuelled by a cocktail of heroin, cocaine and ecstasy consumed off a shovel.
But the "free market theme" is an illusion, since the interbank lending rate is a function of how much base money is available to banks, and base money is by definition the money not produced by "free markets".
The alternative of trying to fix the money supply growth and let the rate "float" doesn't look less like government intervention, and it does involve a lot more wild lurches in interest rates and bank/company failures.
I'd prefer a rules-based monetary policy, eg. the Taylor rule, automatically setting interest rates based on measured inflation, with little room for subjective influence.
The arbitrary centrally-planned foundation of the economy has been clear to those paying attention on the way down, as rates were repeatedly lowered further and further over decades for one political purpose or another. What has surprised me is that the Fed did end up having the will to raise rates a decent amount.
So it seems the Fed actually has been following their technocratic mandate, just with horribly broken criteria based around consumer price inflation - horribly broken because the real price of manufactured goods should have been dropping significantly due to offshoring and technological progress, but the Fed's feedback loop created enough new money so they couldn't (hence the ever-growing asset bubble).
As a libertarian student of Austrian economics, seeing this play out is actually warming me up to Modern Monetary Theory - at least it means the newly created money gets directed to deliberate purposes (like sorely needed infrastructure), rather than just handed to banks in a mostly undirected manner while feigning austerity for everyone else.
All these rate hikes has made me understand how deeply manipulated the economy is. All these scary stories about the old left going to mess with the market ...
It seems to me that the FED arbitrarily can manipulate the lowest return on money invested that is possible to get away with aswell as the highest rate you can expect to get on your money by some opaque banker only interest system.
Like, how is printing money and givinging it to the poor any worse. Both are manipulation.
My gut feeling is that it is a bad idea too. But the defenders of the system do not bat an eye when the Fed pours helicopter money over the rich. The hypocrisy is maddening. It is so dishonest.
I can offer my perspective as someone who would probably be considered a "defender of the Fed" (definitely not government policy as a whole, though).
Pouring helicopter money down is going to increase inflation, hands-down. Giving it to more people will increase inflation more than giving it to fewer people (since the competition for scarce goods will be more widely distributed), but it's just as bad giving helicopter money to the rich.
Helicopter money is largely fiscal policy (i.e. how do we spend our money) instead of monetary policy (i.e. how much money should there be, and how should it flow).
I'll not defend fiscal policy, as I find that Congress often just tries to buy votes with money (the right with tax-cuts, the left with loan-forgiveness or entitlements).
In terms of monetary policy, though, the Fed's responsibilities are to make the employment market and inflation stay at good levels. Manipulating the interest rate of bank lending does do that (albeit not nearly as much as it could if coupled with good fiscal policy).
Raising the interest rate does reduce inflation, since there are fewer free-floating dollars to compete for good. It also does make the job market less hot, since there are fewer free-floating dollars to invest in businesses or employees.
There's some deep hypocrisy in fiscal policy, but I think the Fed is doing what the Fed can do to keep jobs and inflation in balance.
> But there has to be something more I don't understand. The interest on savings goes up with the interest on loans.
This is true, but it's all because of the one interest rate that the fed controls: the interest rate at which it lends to banks. If that rate goes up, then banks are willing to pay higher savings rates to depositors (since banks don't want to pay higher Fed interest rates to borrow, so luring in depositors is a replacement). Since banks are paying more for their money, though, they also need to charge more on the loans they give. This is why those move in tandem.
Quantitative easing/tightening also does one thing: either buy or sell financial assets at the Fed. Historically this has been bonds and other low-yield, long-term instruments, but always with the purpose of either stimulating the economy (by buying assets and pumping money into the economy) or selling assets (thus pulling money out of the economy to cool it). I would agree that the Fed buying stocks during COVID isn't what I would have liked, but mostly because stocks are an asset class where volatility and risk are baked in (and I don't like the moral hazard of the Fed absolving investors of that risk).
Quantitative easing as a mechanism, though, is a pretty blunt and simple tool to either pull money out of push money in to the economy. I reckon that the early-COVID hey-day of easing probably had something to do with the super-high valuations we're seeing today, but the actions the Fed is taking _now_ seem like a reasonable and rational response to that overheating.
Right - this is my hangup too. Look what happened during COVID - 3 trillion dollars were printed. 200 Billion of which went directly to citizens, and the remaining 2.8 trillion were in the form of loans to massive corporations (who didn't need them) that somehow magically were forgiven.
I think just forgiving 2.8 trillion dollars in "loans" to people who didn't need loans in the first place causes a shit ton of inflation.
One side of the political aisle got so angry about that 200 billion to the point that they were only willing to go along with it if their party leader got to put his name on those checks. Yet the 2.8 trillion that went to already profitable corporations (or to fraudulent citizens) went along without a peep from anyone who makes any sort of decision in Washington DC.
All this completely fucked up the M2V (Monetary Velocity) chart, because giving lots of people who won't use it quickly really hurts the economy. When the velocity of money is high, the economy works for everyone, not just wealthy people.
The primary argument against helicopter money is that it greatly accelerates the rate at which inflation manifests in the economy due to the increasing monetary supply, which causes more extreme disruption (the economy doesn't have time to adjust gradually).
If the inflation manifests slowly enough, the theory is that slower inflation combined with productivity growth can mitigate the major adverse effects and dislocations by allowing the economy to adjust at a much slower rate.
It turns out that it's all a system built and operated by humans. It's easy to lose sight of that being born into the world in media res so to speak; there's plenty of path dependence, and to give the economists at least a little credit, some seemingly innate human behavioral factors, but fundamentally it's all a built-up system, and it could have been and could be built differently.
Learning about banking and money from a gold-standard era Rothbard polemic which predates the policies of the modern Fed (and most of the theoretical debates and practical results that informed them) is a bit like learning about the practice of modern medicine from the writings of a 19th century homeopath.
Yes, reading the texts from a school of economics that was capable of predicting the price inflation we see now from the money supply inflation of the previous decade seems like a horrible idea.
Better to read about economics from the Keynesians and Chicago Monetarists who completely fucking failed to see the inflation coming, were "surprised" by it, and are now OVER-tightening their way to a depression. The same schools that only saw a "little froth" in the 2007 housing market, the same schools that STILL have no model to figure out why RRP participation is stubbornly stuck north of $2T, the same schools whose own dot plots are consistently WILDLY inaccurate even 6 months out.
Aside from the fact that my core point was about the fact that the present system didn't even exist in 1963 for Rothbard to get angry about it, the Mises Austrians' habit of making annual predictions of imminent hyperinflation - something which has still never happened in the US - is hardly a track record that compares favourably with more mainstream economists!
Oh, and the current level of price rises? Had it on numerous occasions in the 19th century under the deregulated banking system notionally pegged to gold that Mises and Rothbard fetishised, followed by even more destructive deflation cycles. Plus higher interest rates than the "overtightening"
Guys, I recommended the book because I believe it gives a rather good introduction to the fundamentals of money and banking, even though its title is designed to catch your attention. I am _not_ claiming it's the ultimate source of truth, of course, and sure enough, there is this whole "classical economists" (aka "Austrian" school) vs "Chicago school" (aka "monetarists") going on behind the scenes suggesting other books as well...
Regarding this whole battle I'd say the monetarists should be able to sleep well, since they dominate all economics anyway these days. Neoclassical economics is all about empirical research, quantitative predictions and tests. Insofar it is, of course, a real science and they certainly can do good research.
However, economic policies are rarely evaluated empirically and are usually not justified by real research. And let's face it: the FED's policies are ultimately done do serve the government only (even if it is formally "independent"), since it is a government drowning in debts that profits the most from cheap money unlike its citizens.
Austrians do "economic research" by logical reasoning alone in the tradition of the humanities. They might not publish econometric models but they are able to explain and reason about fundamental economic facts with great clarity unlike most modern economists. This becomes especially obvious when it comes to monetary policies.
Hence, in any economic crisis I recommend reading "Austrian" books because they are able to teach a valuable lesson.
The idea that you will always be able to borrow money at no cost is pure fantasy. Except many, many start-ups and companies built business plans that could only work when they had a constant supply of free loans. A scooter rental startup for example could offer service for less than their operation costs because there was always a spigot of money to borrow.
Yes agreed, I don’t mean to suggest that “high rates bad, high rates fake”. The manipulation makes the economy (seem?) fake either way. With the low rates though IIRC things didn’t happen quite so fast, so the causality wasn’t so blatantly observable.
The fed has a dual mandate (Powell only repeats this 20-30 times during each press conference). Stable prices (2% inflation) and maximum employment.
That dual mandate is what dictates policy. The recent string of rate hikes are not arbitrary, they are because of the surge in inflation flowing the extreme policies the fed took on the other end when unemployment was high during the pandemic.
If anything the case to be made is that the fed went overboard with its QE during the pandemic, but even then its a bit of "hindsight is 20/20". I think everyone can agree that had this pandemic struck in 2000, even 2010 instead of 2020, the economic impact would have been dramatically greater than it was.
The US have maybe a few months to completely undo their stupid sanctions on the Russians and return their money or the de-dollarizarion movement will keep gaining steam and those bank failures will look like children’s play.
There’s no way the USA can survive as a world power if they keep stupidly weaponizing the dollar and weakening its status as the world currency. How do people think we will keep our standards of living if we don’t have the world’s currency to allow us to keep our prosperity by having this massive trade deficit?
You raise a valid point so don't know why you're being downvoted. A lot of my investors reallocated their portfolios when SVB happened to minimize risk due to dollar volatility. I think perhaps this runs counter to the mainstream woke narratives whenever russia comes up
I didn't downvote, but I think one reason is probably the repeated characterization of sanctions and Fed actions as "stupid", since that kind of puts things in an us-vs-them mindset.
For instance, if I worked on a library and someone filed an issue saying "We need to remove the current networking implementation", I'd be interested to hear what they had to say. If someone said "We need to remove the current stupid networking implementation", I'd immediately be on the defensive (since presumably I had thought it was a good idea).
When trying to make a point, it's important to leave room for people that don't already agree with you to be convinced (especially when most people don't already agree with you).
I downvoted because if our collective desire for world peace is anything substantive rather than just vapid, feelgood window dressing, sanctioning Russia is among the first of many actions we should be taking.
And honestly, we aren't doing enough to demonstrate that warmongering is not acceptable in this day and age.
Where was your collective desire for world peace while the US invaded Iraq, Afeghanistan, bombed Lybia, and yes, promoted a coup of state in Ukraine to them close their eyes for 14 years to the bombing of the ethnic portion of their population in Russia?
Have you ever get at least superficially interested in the human cost on the Saudi military intervention on Yemen for the last few years?
Do you want me to introduce you to people that have been tortured by military regimes in South America, every one of them put in the power with the help of the United States of America?
If you think what Nuland and the other neocons that have been in the state department for the last 30 years, no matter which party is in power, are interested in world peace, you've drank too much kool-aid.
A de-dollariztion and a move to what? Yuan? Ruble? Bitcoin?
Sure countries might be unhappy with the dollar as of late, but there really is no serious competitor. It's like being upset with the Ritz and threatening them with moving your stay to the Comfort Inn.
If people start hating the Ritz's policies and prices someone will eventually build a comparable competing hotel, a ready to go alternative doesn't have to already exist. We've created incentives for alternatives to the dollar to spring up, we need to either pray to God they somehow don't or stop incentivizing the alternatives.
Could they be more effective? Certainly. Should they be going much further and actually crippling Putin? Yes. Does Putin deserve to get his teeth kicked in for the shit he's pulling in Ukraine? Absolutely. Should Putin's oligarchic buddies get their fortunes wiped out because of Putin's stupid actions? Certainly.
It's not "The West's" fault that Russia has not modernized at all since the fall of the USSR, nor is it their fault that Russia decided to hand the keys to the kingdom over to a former KGB operative, and keep handing him the keys every chance they got. NATO was essentially created for situations like this - because the powers-that-be knew Russia would try to expand its territory every chance it got.
Lots of uncertainty in the press conference following the interest rate announcement. Seems like the Fed is preparing for the possibility of more restrictive actions in the future, but is waiting for more data to see if such actions are needed. I expect the market to place a lot more weight on data released over the next few weeks.
aka they might have to do 1 or 2 .25bps hikes within the next 6-12 months that originally weren’t telegraphed expectation wise, so stock market will need to moderately correct to the new balance of “expected versus actual”?
Just a perspective to share from someone trying to buy property for a small business(since most people think about it from a residential POV).
Unlike residential mortgages, corporate loans are not fixed interest rates. They are all adjustable. What in 2020 seems financially sound, becomes impossible a few years later.
I can't imagine how other companies do this, do you just make sure your business can handle 12% interest rates just incase a politician decides to give away free money for a few years?
I come from (real) engineering, so everything is just math to me. However the adjustable interest rates is quite a wrench. Do I need to assume a 15% fed reserve interest rate + the 2-4% the bank piles on? Heck, 15% might be low, you never know.
I imagine that all businesses would benefit from having some long term certainty. Maybe mid/large companies can raise money or get fixed loans, but I'm at the point where I need to use my feelings(ewwww) to make a decision.
Can you hedge against it with interest rate swaps? It seems interest rate risk is probably one of the more manageable risks of a small business that is fundamentally dependent on other people's money - how do you know it's going to succeed in the first place even if rates don't increase?
Engineer married a doctor who owns the clinic, no finance people in the family. The company is already doing great, we are just expanding. We have the past performance of the company, so we have an idea if we can afford a set monthly cost.
Rent some finance people. Get someone you can consult with on this stuff. There's almost certainly more pitfalls than we engineer types can logic out from what we know.
Like other cases where businesses focus on their core competency, I think many businesses just rent and let the professional landlords worry about such things. Unless your business is really chiefly a real estate play, like say those self-storage companies that buy property in far-flung suburbs, run a low-investment business for a few decades and then sell the property when sprawl has driven up land values.
There can be good reasons to acquire the commercial property your business utilizes. If you occupy >51% of the space there are SBA loan guarantees which only require 10% down. You can then lease out the remaining space to other tenants.
Basically, just sad to see that money disappear. Not to mention, our last landlord promised the moon and never even fixed their parking lot which caused at least 1 flat tire.
I think you can accomplish interest rate hedging with Eurodollar (apparently now SOFR) futures contracts which are traded on open markets? But I agree with the other poster that OP should find a finance person.
> Unlike residential mortgages, corporate loans are not fixed interest rates. They are all adjustable. What in 2020 seems financially sound, becomes impossible a few years later.
> I can't imagine how other companies do this, do you just make sure your business can handle 12% interest rates just incase a politician decides to give away free money for a few years?
There's probably a larger area of acceptable risk to take for a business loan vs a personal loan, IMHO; but if it's a business loan that you're also personally liable for, that's different. Businesses fail all of the time, and it's acceptable. You also have to consider what leverage the borrower has against the lender. If your business can't pay the loan, will the lender be able to find a buyer if they foreclose? If not, they may be likely to let a default slide. I've heard many stories of commercial landlords that let businesses stay rent-free for years because they couldn't attract a new tenant for the space, and it was better to have it occupied and active than empty. I've never heard of residential landlords letting tenants stay for years rent free unless required to or some other special circumstance.
My interpretation of what the GP is saying is that a politician might give away free money, causing the Fed to react by setting interest rates at 12% to prevent inflation. Suppressing interest rates would be a different form of free money.
Fun fact'! 30-year fixed rate mortgages is a uniquely American thing. Most other countries are adjustable rate mortgages, even for boring primary residential loans.
> Do I need to assume a 15% fed reserve interest rate + the 2-4% the bank piles on? Heck, 15% might be low, you never know.
If you do make this assumption, then your present value of the real estate will ensure you always get outbid by someone with looser expectations. The conservatism of the market is set at the ability to leverage by the lunatics at the margin.
> I imagine that all businesses would benefit from having some long term certainty
Individuals, too: the money you contributed to social security may be gone when you need it, so good luck planning your future. Or maybe you won't get anything until you're 80. Or maybe you'll get half of it. Or it'll be taxed to death.
So for the sake of planning, the common advice to younger workers is to assume you'll get nothing. Get back to work.
There are certain risks that aren't worth hedging in a stable country like the US. E.g. you don't hedge treasury bond defaults because in the unlikely event that happens, your money is probably worthless anyway and you would rather have food and guns.
A 15% interest rate is so high that even if you managed to protect your financing with a hedge, it might be unlikely you have solvent customers anymore.
> The fed funds rate began the decade at a target level of 14 percent in January 1980. By the time officials concluded a conference call on Dec. 5, 1980, they hiked the target range by 2 percentage points to 19-20 percent, its highest ever.
This shows a level of confidence in the banking sector that I find questionable. Risks associated with raising bond interest rates were one of largest factors in the recent bank failures. Surely more bank failures would be seen as worse for the economy than inflation.
If more, larger banks fail in the next twelve months then the Federal Reserve will be sheepish about raising interest rates for the next hundred years. In inflation stays high then it seems likely the Federal Reserve will keep pushing those interest rates higher and higher until something breaks and we enter crisis mode.
Personally, I'd like to see Congress take more action to reduce inflation. Ideally I think the answer is some combination of raising taxes and reducing federal spending, to start to decrease the amount of cashflow. I think some activity on their front can have an impact without introducing the same types of banking risks associated with raising interest rates, and we'll see better results with less negative impact. Of course, given the contents of the Inflation Reduction Act this seems unlikely. The legislative and executive branches seem content to leave inflation to the Federal Reserve, as it absolves them of responsibility.
Inflation costs more than bank failures. The Fed can fix bank failures by providing liquidity on demand - without any limit, theoretically. But unless they tighten rates, inflation will just grow and make future tightening more urgent and less easy to control.
> Surely more bank failures would be seen as worse for the economy than inflation.
I disagree with this. Also keep in mind that the Fed has a dual mandate (price stability and maximum employment); they aren't guardians of the overall economy nor are the responsible for ensuring that banks don't fail.
> Personally, I'd like to see Congress take more action to reduce inflation.
The Fed probably believes that any banking sector issues related to interest rate risk are adequately addressed by the Bank Term Funding Program which allows banks to gradually get past their low interest rate problems and that any banks with assets that can’t take advantage of this program are mismanaged and deserve to fail. And they’re probably not wrong since durational risk arbitrage is literally the core business model of a bank.
What banking sector? I think until the AT1 bond lawsuit gets resolved with a win for the bond holders, all but the biggest banks have serious liquidity issues. There is not going to be a sector but a few chosen survivor banks and some lucky ones.
Private banks are the ones that "print" the money -- common misconception on who does. Fed is saying "well someone needs to lose the money or I will keep increasing rates (until I break the game)" while FDIC and executive branch are saying "nobody will lose any money."
Who do you think is going to win this game of chicken?
We need actions at the speed of "light" compared to Congress speed. That is the reason Congress does not directly handle these issues but a third party, the Federal Reserve, does.
We are practically waiting for the real estate sector to collapse, commercial first, and that money to disappear right now.
> "...the Federal Reserve will keep pushing those interest rates higher and higher..."
They really can't raise interest rates much above 5%, this follows straightforwardly from observing how much of the national budget is consumed by debt service as a function of the interest rate. (Higher rate = larger fraction of budget allocated to debt service, obviously.)
If they go above five-ish percent, this implies that they'll need to either A) raise taxes to a level that would likely inspire mutiny, B) greatly reduce borderline-impossible-to-cut parts of the budget such as the military industrial complex + welfare spending broadly construed, C) increase productivity by a lot, D) monetize the debt or E) default on the debt.
Probably they will attempt to pick F) all of these, in varying degrees, though obviously some are easier to implement than others. Anyway it is very unlikely that we will see rates much above 5% in the foreseeable future.
> They really can't raise interest rates much above 5%
They really can.
> this follows straightforwardly from observing how much of the national budget is consumed by debt service as a function of the interest rate.
Decoupling monetary policy decisions from that kind of fiscal concern is a substantial part of the reason for an independent central bank setting monetary policy.
> If they go above five-ish percent, this implies that they'll need to either A) raise taxes to a level that would likely inspire mutiny, B) greatly reduce borderline-impossible-to-cut parts of the budget such as the military industrial complex + welfare spending broadly construed, C) increase productivity by a lot, D) monetize the debt or E) default on the debt.
Note that the first “they” is the Federal Reserve and all the other “theys” refer to Congress.
Also, while government borrowing costs tend to move in roughly the same direction as the fed funds rate, they very much aren’t the same thing and can be very widely separated.
Much is made of "independent central bank," though I typically think of that independence in the same light as "newspaper with independent newsroom which is firewalled off of the advertising/commercial side such that editorial decisions are never influenced by the business."
In practice Congress and the Fed are sibling entities in the same system, which cooperate when stressed (there are many historical examples of this, e.g. WW2). The alignment is obviously not perfect, but there is much more coordination than "totally independent" as is often bandied about.
> They really can't raise interest rates much above 5%, this follows straightforwardly
Keep in mind this headline 5% rate is an overnight interest rate, not what the Treasury actually pays on the national debt. All treasuries between 2-30 years are trading below 4% today, and obviously long term debt issued when rates were lower remains at those low rates today.
Congress isn't incentivized to fix inflation. On the contrary, stats are concocted from cherry picked consumer goods to show current inflation at lower levels than what is reflected in reality and the specific goods vary depending on their cost at the time stats are concocted. Assets also tend to accumulate value when inflation rises, and so congresspeople know this and accumulate assets that will do so.
Except the US treasury and the Fed gave all US banks a 1yr blank check to get their act together, if rising rates really are causing them trouble. This was during the SVB crash. So no, banks should not fail because of rising rates, if they don't have idiots in charge. Oh wait, SVB failed specifically because they had idiots in charge. Good thing they all got fired. How many more idiots are in charge of banks? The FDIC will find out for us in about a year I'm betting.
> This shows a level of confidence in the banking sector that I find questionable.
No, it doesn't.
Protecting the banking sector isn't part of the monetary policy setting mandate.
> Risks associated with raising bond interest rates were one of largest factors in the recent bank failures. Surely more bank failures would be seen as worse for the economy than inflation.
No, in terms of the Fed mandate, they are not. More business failures, including of banks, are a normal and expected cost of contractionary monetary policy.
> If more, larger banks fail in the next twelve months then the Federal Reserve will be sheepish about raising interest rates for the next hundred years.
They weren’t for the next hundred years after the wave of major banks that failed or needed intervention to avoid failure in the 2007 crisis, obviously, or after the huge number of bank failures during the high rate regime in the 1980s, so...probably not.
> In inflation stays high then it seems likely the Federal Reserve will keep pushing those interest rates higher and higher until something breaks and we enter crisis mode.
Surez if inflation (which is already low but has not stayed that way for as long as the Fed would like) were to bounce back up so the 12-month trailing rate stayed high rather than continuing to settle back to normal, that would be the Fed response. No reason to think that’s likely.
> Personally, I'd like to see Congress take more action to reduce inflation
That, this late in the game, would be a very good way to guarantee an overshoot the opposite way we just did, which would be worse than leaving the foot on the economic gas too long was.
Lots of smoke in the comments here. The Fed is doing what needs to create relative stability. Uncomfortable, but real. Demand is outstripping supply and prices are going up. The least painful option is raising interest rates. Alternatives are hyperinflation, (very bad), or various price fixing schemes (which have literally never worked despite many attempts and are even worse in the ultimate outcomes). There are lots of reasons why this is happening, and none of them are related to a "fake economy:"
People and businesses came out of lockdown with saved money and basically free loans burning holes in their pocket which caused a spike in demand (Least important, probably no longer an issue)
Businesses came out of lockdown with a diminished staff and a ton of new uncertainty (much more important, takes a while to recover for some businesses that are planning production multiple YEARS in advance).
Deglobalization/ U.S. national re-industrialization, started by Trump, continued with Biden, which will increase prices on pretty much everything. This is both a reasonable response to the issue, and makes the issue worse in the short term.
There's a hot war with a major energy producer, Russia, which will increase prices for every product where energy is an input (almost every product).
The biggest manufacturer in the world, China, has randomly been shutting down factories and whole metropolises for weeks at a time for the last several years. We just got a correction in this regard, but it will take time for the supply side of the equation to ramp back up, especially given all of the moving parts and uncertainty outlined above.
Bottom line - lean supply chains function well when everything is stable for a longish period of time and it looks like it will continue to be for a longish period of time. In unstable/uncertain environments, supply chains break down, and supply can't keep up with demand, and the government can't keep handing out free money without causing prices to hyperinflate.
Interest rates affect debt. The higher the interest rate(s) the less debt people are willing to take on. Debt is the lube that keeps the economic wheels spinning.
If you can borrow for 5% but can make 20% return on that money, then you obviously are heavily incentivized to borrow at 5%. If you can borrow at 5% but can only make 6%, you are not really incentivized to borrow. This means less purchasing will happen, slowing down the economy.
To think about it another way, which might help: borrowing is moving money from the future to today. To do that costs you something. The more it costs, the less likely you are to do it.
Credit Cards move money from 30 days in the future to today without much cost(and in the US often incentivized with rewards/cash back, etc). As soon as 31 days happen, the cost to move that money forward in time is suddenly 20+%, making it ridiculous for anyone with a clue to borrow money on credit cards past 30 days.
Mortgages move up your house purchase by up to 30 years. If it costs you a lot more to borrow today than it did a few years ago, you are much less likely to move up that purchase.
The same is true for companies and everyone else. The more it costs to borrow, the less likely you are to borrow, decreasing spending today.
Let's take an extreme example. If banks offered everyone 0% interest mortgages with 100 year terms and no credit checks, how many more people would want to buy a house? A lot! It would take decades for builders to build enough houses to meet that demand. In the meantime, house prices would go up by a factor of 10, along with wood and other building materials. Meanwhile everyone who already owns a house is cash out refinancing their now multi-million dollar home, and suddenly everyone you know who was a homeowner at the beginning of 2023 is now a million dollars richer and spending it quickly.
The same with businesses. Let's say you're a growing business. Things are good and you've been investing your 10% profits each year into hiring. Now banks decide that all decently profitable businesses can have that same 0% interest mortgage with 100 year term. Why not double, triple, quadruple your team? You could achieve your goals so much faster! But then the banks are offering all of your competitors the same deal. But there's not enough talent to go around.
Suddenly you're in a bidding war for decent sales guys and the starting price is a million dollar salary. And those million dollar sales guys are spending their salary, competing with other million dollar sales guys for shit they don't need - the price of everything goes up.
This is an extreme example to illustrate WHAT JUST HAPPENED with record low interest rates. The economy was being heated up by very very cheap money. Inflation started getting out of control.
Now, if you were in the above hypothetical scenario, you might say "Hey maybe we shouldn't give out all those crazy loans, people are going crazy with all of this money, and it's kind of fucking everything up." And you would be right.
The least bad option would be to raise taxes. If the problem is too much money, directly removing the money from the system is the solution. Taxes can be precisely targeted and work quickly. Call it a "windfall tax" for political cover, but given that it would have to be large to be effective, it would be more than that. The Inflation Reduction Act was a good start, but it only raised taxes by $700B.
The next least bad option would be to reduce spending. It'd be slower to act, can't be targeted as easily as increased taxes and there's no possible way to reduce spending by the trillions necessary to have an effect on inflation.
I agree, raising taxes would definitely help AND would help the US govt with their currently fiscally idiotic ways.
Unfortunately, that would imply Congress has their act together. Since they currently can't even manage to keep from defaulting the US govt on their current debt, I'm not hopeful they will stop being fiscal idiots anytime soon. I mean this to imply both political parties are fiscal idiots as far as I can tell.
It's worse. Let's say Congress raises taxes, as some here advocate. All right, what's Congress going to do with the money? Have less of a deficit? Or are they going to find new things to spend it on? Congress being Congress, they're going to spend it. And that won't help with inflation, because it reroutes the money rather than removing it.
I'm sure reasonable people could debate the timeframe ad-nauseum, but I think most people can agree, Congress in general has never been all that fiscally responsible.
> Let's say Congress raises taxes, as some here advocate. All right, what's Congress going to do with the money? Have less of a deficit? Or are they going to find new things to spend it on?
Probably the former; if they found new things to spend it on, they’d spend it independent of whether or not they raised taxes.
Congress understands, even if they pretend not to when it provides a public excuse for opposing popular spending that they choose to avoid (while not bothering with that pretense when they want to spend) that there is no necessary, non-self-imposed, relationship between revenue and spending when operating in your own fiat.
Too slow. While I fully agree that taxes have gotten out of whack and should be raised, raising taxes would have an impact a year from now (way too slow of timeframe to manage inflation). Additionally, practically speaking, the government would have one shot and no realistic way to quickly correct if they raised taxes too much or too little. Finally, there's so much uncertainty in the market when major political decisions like that are afoot, that you risk doing harm just from the perception.
The fed has the power to act quickly. They raised rates a little on almost a monthly basis last year. Each was a little experiment. If they raised them too much, they could reduce them the next month. If they raised them too little to fully counter inflation, they could continue raising them.
Finally, the issue isn't getting "money" out of the system - it's getting purchasing power out of the system - reducing demand. And most people are buying 5-20% of houses, banks are buying the rest. Most large businesses aren't paying cash reserves to pay employees, they're using debt to pay those salaries.
Also, reducing spending is even slower than reducing taxes.
The vast majority of government spending is on Medicare, Social Security, Medicaid, and defense spending. Politically those are untouchable, mostly for good reasons - reducing any of them will result in people literally dying.
The vast majority of what's left is hugely impactful high ROI activities like scientific research, infrastructure projects, and other basic good governance activities.
Raising interest rates also reduces productivity and supply. Raising taxes is more efficient so reduces productivity less than raising interest rates does.
I'm not sure if that's true. And even if it is the effect is much slower compared to the near immediate impact raising interest rates has had.
Also, I consider inflation as a tax on it's own. So adding a tax on top of a tax is pouring salt on the wound if you ask me.
I'm satisfied that cash is paying 5%, at least that takes a bite out of inflation. For the last several years savers have been penalized and borrowers have been spoon fed money so I'm glad that's reversing. And I'm glad that rising mortgage rates are putting a ceiling on the housing market.
No I don't want to pay more in taxes to cover the recent insanity that I had nothing to do with.
Maybe when you advocated for raising taxes you mean somebody else's taxes, not yours? I suppose that's usually what people mean when they say that.
Raising rates is a very poor instrument for fixing supply-driven inflation. Even if it forces suppliers to temporarily lower their prices, as soon as rates are lowered again and economic activity picks back up and demand returns, inflation will return with a vengeance too. Destroying demand does nothing to fix the supply chain problems behind current inflation (which you already mentioned: war, energy, deglobalisation, china lockdowns etc). It’s a pointless, painful exercise and it’s probably being done by the fed only to maintain the appearance of fulfilling their expected role. The truth is the fed is powerless and cannot fix the problem.
I actually 100% agree with this comment, except the "only being done to maintain appearances" part. A blunt instrument is better than no instrument. By raising interest rates, the fed is reducing average inflation by cooling the market across the board (though unfortunately with very little direct effect on the primary driver of energy consumption, which is very inelastic). Without cooling the economy a bit, normal inflation plus the supply side drivers could lead to hyperinflation, and/or stagflation.
Supply chain issues won't sort themselves out for 3-4 years, possibly more - it can take at least that long to get a new domestic semiconductor chip fab or solar panel factory from the idea stage to full capacity. And if you are a business, the level of uncertainty as to what 4 years from now will look like makes a huge investment like that less than desirable. (Source: I work for businesses in these spaces).
Businesses just aren't as nimble as we were led to believe, and it's going to be a bumpy few decades in all likelihood, assuming China stays on the path of no-dissent nationalism and the U.S. stays on the path of re-industrialization.
In the long run, we need to transition the energy grid to electric/renewables/storage as fast as possible to get off of the fossil fuel roller coaster that has caused every major inflationary event. In the medium-term, we need to reduce impediments to building physical things in our country, so that businesses can respond more quickly to increases in prices by increasing supply.
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[ 2.6 ms ] story [ 200 ms ] threadThe Board of Governors of the Federal Reserve System is an executive branch agency whose Governors are appointed by the President and confirmed by the Senate, just like members of other executive branch boards, commissions, and committees... [0]
The Federal Reserve System itself is a weird public/private hybrid thing, but the System doesn’t set monetary policy, the Board does.
[0] hence, e.g., its inclusion here: https://www.loc.gov/rr/news/fedgov.html
To me, anyway, it's more calming. Haha.
But if you put those aside and somehow manage to get a bank charter, you could totally eschew the Fed.
Now if you do play in their ballpark you have to play by their rules. And a big one there is the rate that you’ll get on short term deposits. And given the scale it implicitly sets the pace for interbank rates as they have to directly compete with the Fed.
“People” in my comment includes groups of people too (eg companies, governments). Shouldn’t one be able to set the price of borrowing, why we must have one party deciding for everyone else.
Lending to banks is precisely what the Federal Reserve does.
> Shouldn’t one be able to set the price of borrowing, why we must have one party deciding for everyone else.
This is also already the case. If you want to take out a mortgage or a personal loan or a credit card, the interest rate is negotiated entirely between you and the lender (the government has no say in dictating that rate).
The reason Fed interest rates affect your interest rates is that if banks have to pay more interest to borrow from the Fed, they are willing to offer consumers more money for their deposits, and are also going to charge more for money they lend out (since they still need to make a profit on it).
This is part of the reason for recent bank failures: if you're a bank and you offer depositors 1% on their deposits to go and make long-term investments at 2%, you'll make that 1% difference as profit.
If other banks suddenly start offering depositors 3% (due to increased bank-borrowing rates), you're going to either lose depositors to the much better interest rates at other banks or you're going to have to take a loss on those 2%-investments you made, offload them, and make other investments at a higher interest rate.
In all of this, the only hand the Fed had in things is saying "We're charging banks this much interest on the money we lend them"
The alternative of trying to fix the money supply growth and let the rate "float" doesn't look less like government intervention, and it does involve a lot more wild lurches in interest rates and bank/company failures.
So it seems the Fed actually has been following their technocratic mandate, just with horribly broken criteria based around consumer price inflation - horribly broken because the real price of manufactured goods should have been dropping significantly due to offshoring and technological progress, but the Fed's feedback loop created enough new money so they couldn't (hence the ever-growing asset bubble).
As a libertarian student of Austrian economics, seeing this play out is actually warming me up to Modern Monetary Theory - at least it means the newly created money gets directed to deliberate purposes (like sorely needed infrastructure), rather than just handed to banks in a mostly undirected manner while feigning austerity for everyone else.
It seems to me that the FED arbitrarily can manipulate the lowest return on money invested that is possible to get away with aswell as the highest rate you can expect to get on your money by some opaque banker only interest system.
Like, how is printing money and givinging it to the poor any worse. Both are manipulation.
You might be onto something.
https://en.wikipedia.org/wiki/Helicopter_money
Pouring helicopter money down is going to increase inflation, hands-down. Giving it to more people will increase inflation more than giving it to fewer people (since the competition for scarce goods will be more widely distributed), but it's just as bad giving helicopter money to the rich.
Helicopter money is largely fiscal policy (i.e. how do we spend our money) instead of monetary policy (i.e. how much money should there be, and how should it flow).
I'll not defend fiscal policy, as I find that Congress often just tries to buy votes with money (the right with tax-cuts, the left with loan-forgiveness or entitlements).
In terms of monetary policy, though, the Fed's responsibilities are to make the employment market and inflation stay at good levels. Manipulating the interest rate of bank lending does do that (albeit not nearly as much as it could if coupled with good fiscal policy).
Raising the interest rate does reduce inflation, since there are fewer free-floating dollars to compete for good. It also does make the job market less hot, since there are fewer free-floating dollars to invest in businesses or employees.
There's some deep hypocrisy in fiscal policy, but I think the Fed is doing what the Fed can do to keep jobs and inflation in balance.
Sure, I guess I agree on this.
But there has to be something more I don't understand. The interest on savings goes up with the interest on loans.
Is it maybe "quantitive easing" that is the real culprit?
This is true, but it's all because of the one interest rate that the fed controls: the interest rate at which it lends to banks. If that rate goes up, then banks are willing to pay higher savings rates to depositors (since banks don't want to pay higher Fed interest rates to borrow, so luring in depositors is a replacement). Since banks are paying more for their money, though, they also need to charge more on the loans they give. This is why those move in tandem.
Quantitative easing/tightening also does one thing: either buy or sell financial assets at the Fed. Historically this has been bonds and other low-yield, long-term instruments, but always with the purpose of either stimulating the economy (by buying assets and pumping money into the economy) or selling assets (thus pulling money out of the economy to cool it). I would agree that the Fed buying stocks during COVID isn't what I would have liked, but mostly because stocks are an asset class where volatility and risk are baked in (and I don't like the moral hazard of the Fed absolving investors of that risk).
Quantitative easing as a mechanism, though, is a pretty blunt and simple tool to either pull money out of push money in to the economy. I reckon that the early-COVID hey-day of easing probably had something to do with the super-high valuations we're seeing today, but the actions the Fed is taking _now_ seem like a reasonable and rational response to that overheating.
I think just forgiving 2.8 trillion dollars in "loans" to people who didn't need loans in the first place causes a shit ton of inflation.
One side of the political aisle got so angry about that 200 billion to the point that they were only willing to go along with it if their party leader got to put his name on those checks. Yet the 2.8 trillion that went to already profitable corporations (or to fraudulent citizens) went along without a peep from anyone who makes any sort of decision in Washington DC.
All this completely fucked up the M2V (Monetary Velocity) chart, because giving lots of people who won't use it quickly really hurts the economy. When the velocity of money is high, the economy works for everyone, not just wealthy people.
If the inflation manifests slowly enough, the theory is that slower inflation combined with productivity growth can mitigate the major adverse effects and dislocations by allowing the economy to adjust at a much slower rate.
„What Has Government Done to Our Money?“
https://mises.org/library/what-has-government-done-our-money
It’s a good introduction to banking, money and the business cycle.
Better to read about economics from the Keynesians and Chicago Monetarists who completely fucking failed to see the inflation coming, were "surprised" by it, and are now OVER-tightening their way to a depression. The same schools that only saw a "little froth" in the 2007 housing market, the same schools that STILL have no model to figure out why RRP participation is stubbornly stuck north of $2T, the same schools whose own dot plots are consistently WILDLY inaccurate even 6 months out.
Good advice.
Oh, and the current level of price rises? Had it on numerous occasions in the 19th century under the deregulated banking system notionally pegged to gold that Mises and Rothbard fetishised, followed by even more destructive deflation cycles. Plus higher interest rates than the "overtightening"
Regarding this whole battle I'd say the monetarists should be able to sleep well, since they dominate all economics anyway these days. Neoclassical economics is all about empirical research, quantitative predictions and tests. Insofar it is, of course, a real science and they certainly can do good research.
However, economic policies are rarely evaluated empirically and are usually not justified by real research. And let's face it: the FED's policies are ultimately done do serve the government only (even if it is formally "independent"), since it is a government drowning in debts that profits the most from cheap money unlike its citizens.
Austrians do "economic research" by logical reasoning alone in the tradition of the humanities. They might not publish econometric models but they are able to explain and reason about fundamental economic facts with great clarity unlike most modern economists. This becomes especially obvious when it comes to monetary policies.
Hence, in any economic crisis I recommend reading "Austrian" books because they are able to teach a valuable lesson.
The period of 10 years where rates were 0%+/- with 2-3++% inflation was the fake economy 5% rates with 5% inflation is the real world.
That dual mandate is what dictates policy. The recent string of rate hikes are not arbitrary, they are because of the surge in inflation flowing the extreme policies the fed took on the other end when unemployment was high during the pandemic.
If anything the case to be made is that the fed went overboard with its QE during the pandemic, but even then its a bit of "hindsight is 20/20". I think everyone can agree that had this pandemic struck in 2000, even 2010 instead of 2020, the economic impact would have been dramatically greater than it was.
For instance, if I worked on a library and someone filed an issue saying "We need to remove the current networking implementation", I'd be interested to hear what they had to say. If someone said "We need to remove the current stupid networking implementation", I'd immediately be on the defensive (since presumably I had thought it was a good idea).
When trying to make a point, it's important to leave room for people that don't already agree with you to be convinced (especially when most people don't already agree with you).
And honestly, we aren't doing enough to demonstrate that warmongering is not acceptable in this day and age.
Have you ever get at least superficially interested in the human cost on the Saudi military intervention on Yemen for the last few years?
Do you want me to introduce you to people that have been tortured by military regimes in South America, every one of them put in the power with the help of the United States of America?
If you think what Nuland and the other neocons that have been in the state department for the last 30 years, no matter which party is in power, are interested in world peace, you've drank too much kool-aid.
Expecting such short term strong and worldwide forgetfulness is a deeply irrational line of thought.
Sure countries might be unhappy with the dollar as of late, but there really is no serious competitor. It's like being upset with the Ritz and threatening them with moving your stay to the Comfort Inn.
Could they be more effective? Certainly. Should they be going much further and actually crippling Putin? Yes. Does Putin deserve to get his teeth kicked in for the shit he's pulling in Ukraine? Absolutely. Should Putin's oligarchic buddies get their fortunes wiped out because of Putin's stupid actions? Certainly.
It's not "The West's" fault that Russia has not modernized at all since the fall of the USSR, nor is it their fault that Russia decided to hand the keys to the kingdom over to a former KGB operative, and keep handing him the keys every chance they got. NATO was essentially created for situations like this - because the powers-that-be knew Russia would try to expand its territory every chance it got.
Unlike residential mortgages, corporate loans are not fixed interest rates. They are all adjustable. What in 2020 seems financially sound, becomes impossible a few years later.
I can't imagine how other companies do this, do you just make sure your business can handle 12% interest rates just incase a politician decides to give away free money for a few years?
I come from (real) engineering, so everything is just math to me. However the adjustable interest rates is quite a wrench. Do I need to assume a 15% fed reserve interest rate + the 2-4% the bank piles on? Heck, 15% might be low, you never know.
I imagine that all businesses would benefit from having some long term certainty. Maybe mid/large companies can raise money or get fixed loans, but I'm at the point where I need to use my feelings(ewwww) to make a decision.
Engineer married a doctor who owns the clinic, no finance people in the family. The company is already doing great, we are just expanding. We have the past performance of the company, so we have an idea if we can afford a set monthly cost.
> I can't imagine how other companies do this, do you just make sure your business can handle 12% interest rates just incase a politician decides to give away free money for a few years?
There's probably a larger area of acceptable risk to take for a business loan vs a personal loan, IMHO; but if it's a business loan that you're also personally liable for, that's different. Businesses fail all of the time, and it's acceptable. You also have to consider what leverage the borrower has against the lender. If your business can't pay the loan, will the lender be able to find a buyer if they foreclose? If not, they may be likely to let a default slide. I've heard many stories of commercial landlords that let businesses stay rent-free for years because they couldn't attract a new tenant for the space, and it was better to have it occupied and active than empty. I've never heard of residential landlords letting tenants stay for years rent free unless required to or some other special circumstance.
High interest rates = "giving away free money"?
I thought low interest rates was giving away money?
If you do make this assumption, then your present value of the real estate will ensure you always get outbid by someone with looser expectations. The conservatism of the market is set at the ability to leverage by the lunatics at the margin.
Individuals, too: the money you contributed to social security may be gone when you need it, so good luck planning your future. Or maybe you won't get anything until you're 80. Or maybe you'll get half of it. Or it'll be taxed to death.
So for the sake of planning, the common advice to younger workers is to assume you'll get nothing. Get back to work.
As for having a saving, pension account I'd put a little bit aside in bitcoin, just in case in 10 - 20 years it will be a small fortune.
A 15% interest rate is so high that even if you managed to protect your financing with a hedge, it might be unlikely you have solvent customers anymore.
> The fed funds rate began the decade at a target level of 14 percent in January 1980. By the time officials concluded a conference call on Dec. 5, 1980, they hiked the target range by 2 percentage points to 19-20 percent, its highest ever.
https://www.bankrate.com/banking/federal-reserve/history-of-...
If more, larger banks fail in the next twelve months then the Federal Reserve will be sheepish about raising interest rates for the next hundred years. In inflation stays high then it seems likely the Federal Reserve will keep pushing those interest rates higher and higher until something breaks and we enter crisis mode.
Personally, I'd like to see Congress take more action to reduce inflation. Ideally I think the answer is some combination of raising taxes and reducing federal spending, to start to decrease the amount of cashflow. I think some activity on their front can have an impact without introducing the same types of banking risks associated with raising interest rates, and we'll see better results with less negative impact. Of course, given the contents of the Inflation Reduction Act this seems unlikely. The legislative and executive branches seem content to leave inflation to the Federal Reserve, as it absolves them of responsibility.
I disagree with this. Also keep in mind that the Fed has a dual mandate (price stability and maximum employment); they aren't guardians of the overall economy nor are the responsible for ensuring that banks don't fail.
> Personally, I'd like to see Congress take more action to reduce inflation.
100% agree
Using fiscal policy for inflation targeting is crude and horrendously slow.
Additionally, fiscal policy is little slower or more crude than monetary levers. They could be part of the solution.
But putting on the breaks is not going to get them elected.
So we have the Fed who get to be the bad guys.
Private banks are the ones that "print" the money -- common misconception on who does. Fed is saying "well someone needs to lose the money or I will keep increasing rates (until I break the game)" while FDIC and executive branch are saying "nobody will lose any money."
Who do you think is going to win this game of chicken?
We need actions at the speed of "light" compared to Congress speed. That is the reason Congress does not directly handle these issues but a third party, the Federal Reserve, does.
We are practically waiting for the real estate sector to collapse, commercial first, and that money to disappear right now.
They really can't raise interest rates much above 5%, this follows straightforwardly from observing how much of the national budget is consumed by debt service as a function of the interest rate. (Higher rate = larger fraction of budget allocated to debt service, obviously.)
If they go above five-ish percent, this implies that they'll need to either A) raise taxes to a level that would likely inspire mutiny, B) greatly reduce borderline-impossible-to-cut parts of the budget such as the military industrial complex + welfare spending broadly construed, C) increase productivity by a lot, D) monetize the debt or E) default on the debt.
Probably they will attempt to pick F) all of these, in varying degrees, though obviously some are easier to implement than others. Anyway it is very unlikely that we will see rates much above 5% in the foreseeable future.
They really can.
> this follows straightforwardly from observing how much of the national budget is consumed by debt service as a function of the interest rate.
Decoupling monetary policy decisions from that kind of fiscal concern is a substantial part of the reason for an independent central bank setting monetary policy.
> If they go above five-ish percent, this implies that they'll need to either A) raise taxes to a level that would likely inspire mutiny, B) greatly reduce borderline-impossible-to-cut parts of the budget such as the military industrial complex + welfare spending broadly construed, C) increase productivity by a lot, D) monetize the debt or E) default on the debt.
Note that the first “they” is the Federal Reserve and all the other “theys” refer to Congress.
Also, while government borrowing costs tend to move in roughly the same direction as the fed funds rate, they very much aren’t the same thing and can be very widely separated.
In practice Congress and the Fed are sibling entities in the same system, which cooperate when stressed (there are many historical examples of this, e.g. WW2). The alignment is obviously not perfect, but there is much more coordination than "totally independent" as is often bandied about.
Keep in mind this headline 5% rate is an overnight interest rate, not what the Treasury actually pays on the national debt. All treasuries between 2-30 years are trading below 4% today, and obviously long term debt issued when rates were lower remains at those low rates today.
And, these treasury yields actually fell today.
No, it doesn't.
Protecting the banking sector isn't part of the monetary policy setting mandate.
> Risks associated with raising bond interest rates were one of largest factors in the recent bank failures. Surely more bank failures would be seen as worse for the economy than inflation.
No, in terms of the Fed mandate, they are not. More business failures, including of banks, are a normal and expected cost of contractionary monetary policy.
> If more, larger banks fail in the next twelve months then the Federal Reserve will be sheepish about raising interest rates for the next hundred years.
They weren’t for the next hundred years after the wave of major banks that failed or needed intervention to avoid failure in the 2007 crisis, obviously, or after the huge number of bank failures during the high rate regime in the 1980s, so...probably not.
> In inflation stays high then it seems likely the Federal Reserve will keep pushing those interest rates higher and higher until something breaks and we enter crisis mode.
Surez if inflation (which is already low but has not stayed that way for as long as the Fed would like) were to bounce back up so the 12-month trailing rate stayed high rather than continuing to settle back to normal, that would be the Fed response. No reason to think that’s likely.
> Personally, I'd like to see Congress take more action to reduce inflation
That, this late in the game, would be a very good way to guarantee an overshoot the opposite way we just did, which would be worse than leaving the foot on the economic gas too long was.
People and businesses came out of lockdown with saved money and basically free loans burning holes in their pocket which caused a spike in demand (Least important, probably no longer an issue)
Businesses came out of lockdown with a diminished staff and a ton of new uncertainty (much more important, takes a while to recover for some businesses that are planning production multiple YEARS in advance).
Deglobalization/ U.S. national re-industrialization, started by Trump, continued with Biden, which will increase prices on pretty much everything. This is both a reasonable response to the issue, and makes the issue worse in the short term.
There's a hot war with a major energy producer, Russia, which will increase prices for every product where energy is an input (almost every product).
The biggest manufacturer in the world, China, has randomly been shutting down factories and whole metropolises for weeks at a time for the last several years. We just got a correction in this regard, but it will take time for the supply side of the equation to ramp back up, especially given all of the moving parts and uncertainty outlined above.
Bottom line - lean supply chains function well when everything is stable for a longish period of time and it looks like it will continue to be for a longish period of time. In unstable/uncertain environments, supply chains break down, and supply can't keep up with demand, and the government can't keep handing out free money without causing prices to hyperinflate.
Why is this taken as a fact everywhere. Surely, interest rates is a zero sum game?
I honestly don't understand.
If you can borrow for 5% but can make 20% return on that money, then you obviously are heavily incentivized to borrow at 5%. If you can borrow at 5% but can only make 6%, you are not really incentivized to borrow. This means less purchasing will happen, slowing down the economy.
To think about it another way, which might help: borrowing is moving money from the future to today. To do that costs you something. The more it costs, the less likely you are to do it.
Credit Cards move money from 30 days in the future to today without much cost(and in the US often incentivized with rewards/cash back, etc). As soon as 31 days happen, the cost to move that money forward in time is suddenly 20+%, making it ridiculous for anyone with a clue to borrow money on credit cards past 30 days.
Mortgages move up your house purchase by up to 30 years. If it costs you a lot more to borrow today than it did a few years ago, you are much less likely to move up that purchase.
The same is true for companies and everyone else. The more it costs to borrow, the less likely you are to borrow, decreasing spending today.
The same with businesses. Let's say you're a growing business. Things are good and you've been investing your 10% profits each year into hiring. Now banks decide that all decently profitable businesses can have that same 0% interest mortgage with 100 year term. Why not double, triple, quadruple your team? You could achieve your goals so much faster! But then the banks are offering all of your competitors the same deal. But there's not enough talent to go around. Suddenly you're in a bidding war for decent sales guys and the starting price is a million dollar salary. And those million dollar sales guys are spending their salary, competing with other million dollar sales guys for shit they don't need - the price of everything goes up.
This is an extreme example to illustrate WHAT JUST HAPPENED with record low interest rates. The economy was being heated up by very very cheap money. Inflation started getting out of control.
Now, if you were in the above hypothetical scenario, you might say "Hey maybe we shouldn't give out all those crazy loans, people are going crazy with all of this money, and it's kind of fucking everything up." And you would be right.
And so is the Federal Reserve.
The next least bad option would be to reduce spending. It'd be slower to act, can't be targeted as easily as increased taxes and there's no possible way to reduce spending by the trillions necessary to have an effect on inflation.
Unfortunately, that would imply Congress has their act together. Since they currently can't even manage to keep from defaulting the US govt on their current debt, I'm not hopeful they will stop being fiscal idiots anytime soon. I mean this to imply both political parties are fiscal idiots as far as I can tell.
For well over 200 years. Compared to how Andrew Jackson destroyed the US economy, the current Congress is doing fairly well.
Probably the former; if they found new things to spend it on, they’d spend it independent of whether or not they raised taxes.
Congress understands, even if they pretend not to when it provides a public excuse for opposing popular spending that they choose to avoid (while not bothering with that pretense when they want to spend) that there is no necessary, non-self-imposed, relationship between revenue and spending when operating in your own fiat.
The fed has the power to act quickly. They raised rates a little on almost a monthly basis last year. Each was a little experiment. If they raised them too much, they could reduce them the next month. If they raised them too little to fully counter inflation, they could continue raising them.
Finally, the issue isn't getting "money" out of the system - it's getting purchasing power out of the system - reducing demand. And most people are buying 5-20% of houses, banks are buying the rest. Most large businesses aren't paying cash reserves to pay employees, they're using debt to pay those salaries.
The vast majority of government spending is on Medicare, Social Security, Medicaid, and defense spending. Politically those are untouchable, mostly for good reasons - reducing any of them will result in people literally dying.
The vast majority of what's left is hugely impactful high ROI activities like scientific research, infrastructure projects, and other basic good governance activities.
Taxes also reduce productivity/supply, which is that opposite of what you want.
I'm not sure if that's true. And even if it is the effect is much slower compared to the near immediate impact raising interest rates has had.
Also, I consider inflation as a tax on it's own. So adding a tax on top of a tax is pouring salt on the wound if you ask me.
I'm satisfied that cash is paying 5%, at least that takes a bite out of inflation. For the last several years savers have been penalized and borrowers have been spoon fed money so I'm glad that's reversing. And I'm glad that rising mortgage rates are putting a ceiling on the housing market.
No I don't want to pay more in taxes to cover the recent insanity that I had nothing to do with.
Maybe when you advocated for raising taxes you mean somebody else's taxes, not yours? I suppose that's usually what people mean when they say that.
Supply chain issues won't sort themselves out for 3-4 years, possibly more - it can take at least that long to get a new domestic semiconductor chip fab or solar panel factory from the idea stage to full capacity. And if you are a business, the level of uncertainty as to what 4 years from now will look like makes a huge investment like that less than desirable. (Source: I work for businesses in these spaces).
Businesses just aren't as nimble as we were led to believe, and it's going to be a bumpy few decades in all likelihood, assuming China stays on the path of no-dissent nationalism and the U.S. stays on the path of re-industrialization.
In the long run, we need to transition the energy grid to electric/renewables/storage as fast as possible to get off of the fossil fuel roller coaster that has caused every major inflationary event. In the medium-term, we need to reduce impediments to building physical things in our country, so that businesses can respond more quickly to increases in prices by increasing supply.