Inflation is high, so interest rates need to go up to try to slow that, but the economy isn't doing amazing already, and higher interest rates won't help that.
Not to mention the US debt is _high_ as hell and bond yields mean that's more expensive.
And the country is run by a broken fool who has no interest or ability to fix any of that.
> And the country is run by a broken fool who has no interest or ability to fix any of that.
Trump will be gone in three years, but you'll still have an electorate that wants more free stuff while also getting tax cuts. There is zero appetite for fiscal reform in the U.S. The geometric growth rate of U.S. debt has been consistent since 2010 and will remain so when AOC is President: https://usafacts.org/answers/how-much-debt-does-the-us-have/...
You really really just need to raise taxes. Just find a way to sell that to the public (focus on the rich or large corporations or whatever outgroup you want basically)
Our budget deficit is $2 trillion. To close it, you need to significantly raise taxes on the fattest part of the income curve, which is the top 25%. They have $10 trillion of income. https://taxfoundation.org/data/all/federal/latest-federal-in.... An across the board 200 basis point increase would close the deficit. That would raise their taxes to 38% at the low end to 46% at the high end, which is perfectly fine.
The problem is that the top 25% isn’t an “out group” in either coalition. Facebook PMs making a million dollars a year—squarely in the top 1%—are Democrats who don’t want to increase their own taxes. Neither party is politically capable of taxing the group they actually need to tax.
The wealthy have been taxed appropriately in the past, we just need to do it again. There is precedent.
The Peak Year (1944): The 94% rate applied to taxable income over $200,000 (which included a 3% regular tax and a 91% surtax). That $200,000 would be incomes over $3.8 Million today.
The High-Tax Era: Top marginal rates remained above 90% for two decades, spanning from 1944 through 1963.
This is supposedly the era that made America "great".
Okay, but how much tax revenue was raised from those high marginal rates? The top rate is meaningless without knowing how much money that actually brings in for the government. That’s the key part of the analysis for purposes of this discussion.
Aside from a brief blip during WWII, federal tax receipts as a percentage of GDP have been stable at around 17% of GDP, going back to 1950: https://fred.stlouisfed.org/series/FYFRGDA188S. Those high marginal rates never actually raised very much revenue. To close the deficit, we have to get that 17% number up to 23%.
To raise revenue, you need to lower the threshold at which high marginal rates kick in so that you actually capture the fat part of the tax base. About half of all income is earned by people making $100k-800k. That’s around where the heavy tax burden falls in every western european country.
Covid? Half the money printed happened under his watch the first admin. Biden continued the other half. Now we have yet another war to make matters worse. What are you proposing be done to fix it?
> he caused a large part of it for unclear reasons
Technically it was Besset, but Trump gave him the reigns.
The purpose seems to be to radically debase the dollar and setup a crises that requires an entitlement cut (Social Security) for "the good of the economy" while also expanding military spending at the same time.
Long term bond yields are not directly tied to the Fed funds rate.
The problem is the debt purchased by the Fed during QE had extremely low yields (COVID era) the reserves held by banks created by the Fed during QE now cost more to service by the Fed.
There is also insane amount of debt from ai related investment. China's free model is crushing the ai margins while these companies need to pay their debt and obligations. The debt bomb clock is ticking.
Disagree, fairly strongly. In 2008, four trillion dollars evaporated. In order to keep the economy from completely crashing, the Fed created $4T using QE and such tricks. The result was 15 years of flat. No inflation for 15 years. If inflation shows up a decade and a half later, that probably wasn't the fault of how QE was done.
- I absolutely agree that inflation has nothing at all to do with QE, people who claimed that are just idiots who have a gold fetish.
- the problem I'm talking about is the fact that central banks didn't use QE as an opportunity to erase the public debt it bought. At the time it wouldn't have been an issue in any way. But now because inflation is back (due to oil) central banks cannot buy government bonds when they reach maturity and have to raise rates. Then the government bonds have become very expensive, and it has to be paid to the private sector on the market, so whenever a US govt security reaches maturity, the budget constraint increases. Sterilization of the debt would have alleviated this issue a lot at no cost.
I see. Well, what you propose might have the minor problem of being illegal for the Fed to do. I'm not perfectly sure (and I don't want to take the time to research this rabbit hole right now), but the Fed is deliberately different from the Treasury. It's not supposed to fund the government by creating money.
At a minimum, doing so would have created doubts about the future of the dollar. (Because countries that start having the central bank create money to fund the government often wind up in runaway inflation, with the currency becoming worthless.)
As to a 4% target: Given that they were stuck at 0% for the next decade (and tried, and failed, to get up to 2%), why would they move the target to 4%? They already couldn't do what they said, why double their failure?
> see. Well, what you propose might have the minor problem of being illegal for the Fed to do. I'm not perfectly sure (and I don't want to take the time to research this rabbit hole right now), but the Fed is deliberately different from the Treasury. It's not supposed to fund the government by creating money.
That's a good point, but it's not as clear cut. The Fed is supposed to achieve the double goal of full employment and price stability and it's not forbidden to make money out of thin air for that purpose, that's the reason why QE is a thing at all. The exact legality of canceling US debt on its balance sheet isn't clear, but:
1. Before 2014 the Obama admin had the power to pass a law making that explicitly legal.
2. There are examples of theoretically valid instruments to achieve the same goal which have been discussed in the period (see the “1 trillion dollar coin”).
> At a minimum, doing so would have created doubts about the future of the dollar. (Because countries that start having the central bank create money to fund the government often wind up in runaway inflation, with the currency becoming worthless.)
Context matters: doing it now would send a disastrous signal, but back in the early 2010s the challenge was to drive inflation up, which is why the Fed used QE in the first place. If anything such a move could have made QE more efficient to achieve its goal (in addition to helping today's public finances, which I argue would have had a stabilizing effect over the long run).
> As to a 4% target: Given that they were stuck at 0% for the next decade (and tried, and failed, to get up to 2%), why would they move the target to 4%? They already couldn't do what they said, why double their failure?
The IMF paper I linked above is pretty clear about the goal of such a measure, but the idea is to have more leeway in case of crisis, because if your inflation is around 2%, your Fed target rate is around 2% as well and you can only lower it by 2% as a stimulus measure, whereas with a 4% baseline inflation rate you have twice the leverage in terms of target rate.
Re 4%: And, as we saw in 2008 and after, being stuck against 0% with no room to move is a really uncomfortable place to be.
Re the "1 trillion dollar coin": I like your wording: "Theoretically valid". I don't like YOLOing theoretically valid moves in a crisis, only to find out a month later that the courts rule them invalid and you have to unwind them.
> I don't like YOLOing theoretically valid moves […], only to find out a month later that the courts rule them invalid and you have to unwind them.
I agree, which is why I put “go through the legislative process to make that legal” above. Especially since there was no real emergency. (“in a crisis” though going YOLO may still be worth it though, because it may be enough to earn the time you need to go through the bottom of the crisis. And also if it's very unclear how legal/illegal this is, the fait accompli may be enough to convince the judges to side with your decision in order to put the country in too much of a trouble).
The country has been _run_ by fools for 26 years. Congress has had 26 years to do something about the fiscal situation, and we've had four presidents, and the fiscal responsible side of the electorate is never listened to.
Both sides are to blame - neither will fix the problem. Obama could've made that his goal - he was competent, had a lot of political good will, and many people were frustrated at the bailout policy Bush did, but instead it was inflationary printing (quantitative easing), Obamacare and Cash 4 Clunkers (which the used car market still hasn't recovered from).
I never voted for him - I didn't view him as honest, nor did he seem to indicate that he liked America, but was rather just a good talker - but I think he could've been a great president given a less radicalizing agenda.
He was probably the best situated president in terms of timing to fix the debt problem, but instead it was a good time for divisive politics. By the time Obama finished, it became clear neither party actually cared about the fiscally conservative Ron Paul supporting voting block.
I would love to hear what was "radical" or "divisive" about Obama's policy. A significant portion of the country disliking him because of his skin color doesn't make his policies "radical"
A universal health care mandate were both radical and divisive, and the popular nickname for the ACA today is "Obamacare".
I happen to think the policy was a good idea, and voting to keep it in play was the best vote of John McCain's career ... but it was definitely both radical and divisive.
Now, much of the "mandate" has been stripped away, health care remains a mess, and access is far from affordable, but you can't really blame that one on Obama.
> A universal health care mandate were both radical and divisive
It seems quite ironic, given the frequent complaints about the inability of Congress to either govern effectively or fix health insurance (for many and various definitions of "fix"), that the ACA was so divisive. At least it got passed! Yet given the opportunity twice (2017-2019, 2025-2027), a politically viable alternative hasn't been offered up by opponents of the ACA, let alone being able to fully repeal it.
Lol cool so health care is your definition of "radical" and "decisive". Hint: it's neither of these things and the only reason it was considered as such was because Obama was black (see tan suit). Seems like we need a few more years of woke cause you still can't see the obvious
Why specifically 26 years? I agree that Congress has been increasingly useless, leading to more and more rule by presidential decree in order to have a government that runs at all, but there wasn't a step function 26 years ago.
its because prior to that (2000 Bush era), congress and president had a plan to payoff debt and had a balanced budget plan in place to avoid over spending.
> The country has been _run_ by fools for 26 years.
It's hard to accept the 'everyone is the same' in light of Trump's antics. Remind me again which presidents started wars of choice at the behest of Israel even when they were explicitly warned of the consequences?
For those of us without a degree in economics the last few years have seemed a bit unhinged from reality so I will not claim any deep insight here. However, it is hard to imagine that an increase in cost of debt will not have some impact and probably in ways not anticipated by many of those with economics degrees.
Higher rates means financing/borrowing is more expensive. Mortgage rates will go up, possibly pushing home prices down. This is neutral for buyers because of higher rates, but bad for sellers. Loans (personal or business) will be harder to come by. Layoffs, or at least hiring freezes, are more likely. Companies will move into a defensive rather than an growth mode. Higher unemployment will lead to more desperation, and possibly consumer defaults on loans and mortgages.
Government interest payments, which are already high, will become higher after future bond sales. This will compound future budgetary problems and could eventually lead to cuts in entitlements. If so, expect crime and political instability (already a problem) to rise in the future. This will take a while, though.
Normally rates are increased to lower inflation by reducing the supply of money. Given the multiple concurrent problems with energy (Hormuz, Red Sea/Yanbu, Russia/Ukraine, possibly Libya as problems are starting there, China is buying aggressively) then higher rates may not be enough to stop inflation. This would create a situation where both borrowing is harder and inflation continues to rage. This is very bad and will lead to demand destruction (nobody’s buying anything because it’s too expensive and they can’t finance it anyway). This results in a severe recession at the minimum.
Your graph shows that home sales have been at a constant rate for the last 3 years. They are way down from 2020-2021, when covid plus low interest rates caused a home buying frenzy, but this is not new. We've been in this regime for the last 5 years, 25 basis points is not going to change anything. In fact, interest rates are lower now than they were a year ago.
That's not to say that rising rates aren't a sign of bad things, the definitely are, it's just not going to make much of an impact.
Sales have remained low (at GFC levels) while inventory has continued to climb. In other words supply is up and demand is flat. Doesn’t look good to me, but what do I know.
It all depends on how long buyers (in aggregate) are willing to hold out, or are unable to buy. And nobody really knows that.
As a buyer you rather want to take out a loan in a high interest rate environment than a low interest rate environment, given that the monthly payment is the same.
1000 usd extra paid towards your mortgage actually makes a difference when the rate is 15% compared to when it is 1.5%
There's also "date the rate, marry the price". If you're a buyer and think that rates are going to come down within a couple of years, you can lock in the lower price of your home for property tax purposes and then refinance when rates are lower.
But a lot of people bought in 2024 expecting that to happen.
He assumed that the payment is the same meaning the principal for the same house went down and so this is neutral. If your payment is the same it doesn't matter what is principal vs interest. In the best cases rates go down in the future and then you refinance and your payment goes way down.
House prices tend to be "sticky", so that assumption is probably wrong. People who own a house often cannot afford to sell for the current value since it won't pay off their loan and leave enough money left over for a replacement house so they avoid moving. Eventually things get bad enough that they "sell short", but that takes a credit hit so you don't want to do that until the loss is large (and in turn you gain more).
Only if you expect rates to come down in the future. If the monthly payment is the same, I guess you have a slightly bigger mortgage interest deduction for tax purposes, but you’re still paying the same amount each month.
If you expect rates to come down soon, you can plan to refinance in the future, but that’s a gamble. Rates may not go down, or the value of the house could go down before you refinance, which may make refinancing more expensive depending on how much you owe.
If you’re paying the same amount monthly, your cash flow is the same. Are we not comparing apples to apples here? I mean a traditional fixed mortgage.
I’m comparing a mortgage with a high rate and lower principal to one with a lower rate and high principal, where the minimum monthly payments are the same and the owner pays the minimum.
A high interest mortgage just means that you pay more total interest over the life of the mortgage. In any case traditional mortgages are front-loaded, so you pay more towards interest up front than you do principal.
This is true, but I was not assuming extra payments and I don’t know where you got that assumption from. Many people can’t afford to make extra payments given the already high cost of housing and the rising cost of everything else.
The question is what will rates do in the future. If rates go down you refinance, if they go up even more you hold your rates. Either way so you are fine long term, but it can be 10 years before it pays off.
Note that the US mostly does fixed rate for life of the loan. Many countries only have ARM (adjustable rates), and those exist in the US as well. If you have an ARM that changes things greatly.
Mortgage rates are not decided by the fed rate as much as they are by the bond yields. There’s a reason why the mortgage rates were above 7% yesterday even when the fed rate has been stable for a while.
This rate hike is aimed to stabilize the bond yields which in turn will lower the mortgage rates.
If interest rates go up, bonds get sold (for better yield bearing products), pushing the yields of those bonds higher. And it finds some equilibrium. The fact it isn't immediate has to do with short term vs long term bonds. When they mature and the pace of arbitrage.
I don't see how a rate hike is meant to lower mortgage rate. And just looking at the figures shows it's the opposite effect.
Logically, if borrowing money becomes more expensive, how could borrowing specifically for the purpose of buying houses become cheaper.
You have to look at the current context. Bond yields have been spiking, mostly because of the inflation expectations from oil prices and tariffs (mostly oil prices). Mortgages mostly track 10 year yields, which is why when fed dropped the rates back to back, the mortgage rates didn’t come down. The current hike (and the next one) is supposed to create a deflationary pressure, but also provide confidence to the market that the fed will step in to cool inflation if necessary. This in turn lowers the yield on 10 year treasuries and therefore mortgage rates.
The fed rate provides a floor for mortgage rates, but the 10 year yield and mortgage demand decide the ceiling. Currently the demand is pretty low, and therefore the yield mostly controls the mortgage rates.
what I'm saying is that Fed hikes interest rates → bonds sell off → yields rise → mortgage rates rise.
This is logical and empirically observed.
But you are right on the longer term effect. Zooming out: Fed hikes → inflation cools → inflation expectations fall → yields fall → mortgage rates fall.
But the latter is not guaranteed, and it takes time.
I'm unsure to understand how the ceiling and floor mechanisms work. But will dig into that. Thanks.
It seems like this would depend on the bond market’s perception of whether or not this hike is the start of a trend. It could be seen as a signal that political attempts to lower rates have been unsuccessful.
“Higher rates means financing/borrowing is more expensive. Mortgage rates will go up,…”
This is highly inaccurate. The 10 year US treasury is a better metric for predicting mortgage rates. We saw this during the past interest rate cuts, interest for loans and mortgages still went up, remember? I do, because I was borrowing at the time. And why was that? Because the 10-year treasury continued going up, and that matters more than short term interest rates. The 10-year treasury is about expectations about the future, so we need to look at how the market responds before screaming mortgage rates will go up, they could actually go down.
I didn’t say it was the best metric, but they trend in the same direction over time.
The 10 year and fed rates are usually correlated. Occasionally rates spike or dip without moving the 10 year, but these events are brief. This could be a short spike, but only time will tell.
Stagflation is when the economy stagnates yet inflation is higher than ideal. Inflation and economic activity are typically correlated, and the conventional wisdom back in the day was that you couldn't have unemployment going up and things costing more, because it was expected that demand going down puts a downward pressure on prices. When people aren't hiring and buying but things cost more and more, life just kind of sucks. The last time this happened was in the 1970s in the aftermath of a few oil embargoes that made oil prices go through the roof and a disastrously expensive failed war in Vietnam, there was gas rationing, it sucked.
You may notice a few key similarities now with oil embargoes, reduced hiring, an extremely expensive war, and rapidly expanding government debt as a result of that war. If you want a qualitative feeling about people's moods in the 70s, you can watch such movies as:
Taxi Driver
The Deer Hunter
The Warriors
Americathon
Network
This is the right move. Inflationary pressures due to high oil prices and tariffs are not going away anytime soon. All the economic numbers point to a need for a rate hike. Not doing so has a much larger effect on the financial system than a 25 bps rate hike. Stagflation is a bigger risk to the economy.
Counterintuitively the rate hike can help lower things like mortgage rates by stabilizing the bond yields.
The country - particularly this industry, information technology - got addicted to cheap cash. Worse, people didn't want to pay any of it back in tax, so bond yields are going to go up on the debt that was issued to cover deficit spending.
Should be interesting to see how this impacts the AI hyper-scalers. They were already burning through cash like a furnace and were running out of people to borrow from, thus the IPO hopes.
>Should be interesting to see how this impacts the AI hyper-scalers. They were already burning through cash like a furnace and were running out of people to borrow from
looks very similar to 2007-2008 - high rates plus an wide economy segment with very large debt. Now, the interesting question - did anybody "too large to fail" do (or got exposed in some other ways to) leveraged CDS on the hyperscalers bonds and private debt.
To be honest though cash hasn't been cheap for a while, not really since 2021. We have been in relatively high interest rates for the entire AI boom. Going from 350-375 to 375-400 won't be a huge shock for hyperscalers. Interest rate are still lower than when many made their initial investments in 2023-2025
Edit: Whoever the hell flagged this lol....people were complaining the parent comment wasn't helpful so I took time to write a thoughtful response with citations. You can't win around here.
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The counterintuitive part is that a lower Fed rate doesn't necessarily mean cheaper borrowing for the government. The Fed sets an overnight rate; someone lending for ten years cares about inflation and interest rates over those ten years. Keeping short-term rates low won't necessarily reassure that lender. [1]
It also helps to distinguish the government's debt from a giant credit card. Existing fixed-rate bonds keep their agreed interest payments. Higher borrowing costs feed into the budget as old debt matures and gets refinanced, and as new debt is issued. The pain accumulates rather than arriving all at once. [2]
Nor does a larger interest bill automatically require "printing money." Treasury borrowing and Fed money creation are separate decisions. [3]
The difficult question is how to contain inflation without causing more economic damage than necessary. A large debt load makes that tradeoff more expensive; it doesn't make either option painless.
I thought bumping up the prime rate slowed consumer spending. But the recent price hikes are because supply is hosed (oil, tariffs), not that demand has been bidding up prices. So how is this supposed to help?
It doesn't matter whether it is a supply shock or a demand shock, the correct response to inflation is to raise rates, which reduces economic activity and in this situation the reduced activity reduces demand for oil, which is what is needed in an environment in which we have less oil than normal.
Although it is the third world that is going to take the hit, the wealthy nations will bid up the price of oil to ensure they continue to get it, the poorer nations will be priced out. What is an annoyance in the west -- say needing to delay a major purchase or postpone a vacation or reduce expenses - translates to famine and deindustrialization in the global south.
Maybe it's not such a good idea to be waging war against major resource exporting nations, the US and Europe are now sanctioning about half of the global resource exporting nations, and the only benefit of this is higher prices in our domestic economies and China coming in to sign trade deals for discounted Russian and Iranian oil.
KSA also needs to lay off the Houthis and lift the embargo, it's long past time that they give up trying to control who runs Yemen.
Unfortunately, during that time is when they screwed around with the gold confiscations. So the best option would have been to illegally hoard gold until they struck the statute down?
Oof. Wasn't private gold ownership illegal until 1975. So, you have to hide it for 40+ years? That investment strategy has some significant downsides...
I'm shocked that more people don't know about this. It seems insane that the "land of the free" (yeah I know, not really, but that's the pitch anyway) would have such an obviously command-economy policy through the heart of the cold war.
Prediction: this causes a recession in two years, right after a Democrat wins the White House, who will be blamed for it. The economy will turn around after a few years, just in time for a Republican to win and claim they fixed it.
This is how Republicans have a reputation for being economically savvy despite actual evidence to the contrary, because the general population doesn’t understand that economics runs on a time delay.
And which party controls congress? I'll give you a hint: It's the party that spent decades advocating for irresponsible tax cuts without cutting spending[0].
[0] Yes, I know that the Republicans said that they were going to cut spending to match the tax cuts, but that never ends up happening.
Assuming you're talking about the Senate filibuster, then this can be changed or removed by simple majority vote. It's not in the Constitution, just a rule that the Senate adopted.
Like, personally I think that even sans filibuster, the Senate would move much slower than the House, because of election cycles.
The BBB, Iran war, and tariffs, something done solely by republicans, sometimes just the president, are the source of inflation, so you can attribute this situation mostly on Trump, and fully on republicans.
On an earlier HN economic story, someone provided data showing that this is entirely the responsibility of Republican administrations. Going back to Eisenhower, the Deficit has only increased under Republican Presidents and only decreased under Democratic ones (with one exception, Johnson was slightly positive in Deficit increase).
Presidents cannot pass fiscal policy. They can only act on existing policies that give them fiscal latitude. That some rando on the internet has put together a table of numbers has no bearing on that fact
I’ve said this enough in this thread explaining this fact to people saying the same thing over and over so this will be my final comment in this thread
> This is how Republicans have a reputation for being economically savvy
Also you can just reduce taxes (especially corporate ones) AND increase spending, as the deficit suddenly doesn't matter anymore. The important thing is really who's on the girl's soccer team, so there's literally no other party to vote for. Rinse and repeat.
What results? Overnight interbank loan rates, yes, immediately. The effect of those rates on the economy? It will take time to propagate. Heck, some important committees only meet like twice a year.
At what point into a presidential term does it become their actual mess? And is there evidence of a time delay? Because by that argument, the mess we are in would been caused by Democrats.
There's not a constant cutoff. It depends a lot on what the president and the administration do. Does the president push the button and start nuclear war? They are the primary driver for the new economy. Does the president continue the same policies that were working for the last decade and continue to work for the length of their presidency? They might never be the primary driver.
Arbitrarily decided by the person with political convictions blinding them.
Yes, it happens to both sides. People convince themselves their side always makes right decisions, the other side always wrong.
The truth is that the secret sauce is in the pendulum going back and forth. The excesses of one side are soon erased by the other. It is working, as it has for many years.
Another possibility is recession in next two years, but its brief enough that recovery starts before 2028 election - republicans take credit and voters believe it - JD Vance gets elected president.
I recall reading something from axios or similar, talking about how a CEO said a "nice light recession right now would be perfect for us" or something to that effect.
It’s optimistic to assume that a Democrat will be permitted to hold the office of the President. It came down to Mike Pence last time, and things have changed a lot since then.
But not doing this would, in two years, cause (or at least allow) inflation that would cause harm, too. But Trump might get blamed in that case, because inflation would increase for the next two years, and so people would experience the pain during his term.
> Prediction: this causes a recession in two years
"this" (raising the fed rate by .25%) is not what causes a recession in 2 years, it's what led to "this" (the ill-advised, badly-planned, Iran war) + tariffs + popping AI bubble that will do that.
> This is how Republicans have a reputation for being economically savvy despite actual evidence to the contrary, because the general population doesn’t understand that economics runs on a time delay.
And it's how Democrats have a reputation for being the "wrongly victimized underdog / misunderstood savior" despite actual evidence to the contrary, because the general population doesn’t understand that economics runs on a time delay.
A 0.25% rate hike is going to cause a recession? How, exactly, would that happen?
Honestly it seems your post is heavy on politics but I am not seeing an actual argument anywhere in there.
My canned response to people being upset at various policies or ratios, whether it is inflation, or bond yields, or market movements, is to ask them what they think the correct value should be. Stop complaining about the movement and instead ask them for their target. You think a 4% FedFunds is too high or too low? What do you think the correct value is and why? You think the stock market is too high or too low, what do you think the correct value of the index should be?
Most people, who were just moments ago vociferously complaining about a movement, when asked this question fall silent, because they have no idea what the target should be, and because they have no idea about the target, they really have no business complaining about movement. Instead, they use the movement as a springboard to air their ideological beefs. But if you are going to tie some thesis to a rate hike, you better be able to explain what you think the correct rate should be and why. I'm waiting.
Personally, I think a 4% rate is perfectly fine. 5% may even be warranted, and historically this has not been a high rate, if you assume, say, 2.5% inflation and 2% GDP growth, this is a pretty reasonable place to be.
I dunno about the politics, but personally I don't think there is a generic "correct" value. The rate describes the state of the world, and the "correct" value is whatever accurately describes the state of the world.
There is a separate question though - is that state of the world good or bad for people? Is it better or worse today than it was yesterday? What can we do - collectively - to push it in a direction that best serves our collective interests? These are valid questions to ask, and I think each takes us further in the direction of politics.
I personally don't think there's a correct concept of money. Money describes how happy I feel, and the correct money I should have is whatever describes my current mood.
So what can we collective do with money so I feel most happy. This may be the most important question of all to ask.
> A 0.25% rate hike is going to cause a recession? How, exactly, would that happen?
I didn’t see anyone claim a single 25 bps hike will cause a recession.
The 30 day FFR futures (/ZQ) curve is pricing in an 80% chance of two more hikes by the March 2027 meeting and a 70% chance of 3 or 4 hikes by Sept 2027’s meeting. So, 50 bps predicted in the next 6 months and 25-50 bps more within one year.
Yes, I think 5% will eventually happen, but I don't think we'll get there before the mid-terms, the Fed moves slowly.
Basically you have an inflation shock and you want the reaction function to be higher, so if inflation is 1% too high, you want a 1.5% or 2% rate hike. If inflation is 1% too low, you want a 1.5% or 2% rate cut. The reaction function has to be greater than the deviation from target, but this gives you price stability, it doesn't require a recession, although it may cause a recession.
I don’t understand why central banks seem to use such a blunt object like interest rates for every inflation problem. It would make sense to rise if the cause of inflation was accelerated economic activity, not price rises due to supply restrictions. How does hurting mortgage holders even more help with not starting wars? All it can do is have a double dampening effect on the economy as people pull back their discretionary spending.
Using interest rates for this kind of inflation is guaranteed to cause a recession.
It's not good for the economy when no one is willing to move for the next 20-30 years. And it's not good for the people who are unable to move to chase a better job as well.
>My canned response to people being upset at various policies or ratios, whether it is inflation, or bond yields, or market movements, is to ask them what they think the correct value should be.
Maybe find a better canned response? US debt has never been higher, and because of this even rates that are below historic highs can cause economic chaos.
Did you ever think that the reason why US debt is so high is because rates are so low and borrowing is so cheap? Higher rates are needed, and are really the only mechanism to reduce borrowing.
We are seeing asset bubbles across the board in this economy, in housing, in equities, auto loans, etc. It turns out that if you make something cheap, people buy more of it, and that includes the government.
I agree with you, and this is much better than your previous "canned response". However, this goes back to my previous point that even historically low rates can cause economic chaos if the debt is high enough.
At this point its probably more like 12% temporarily because the more correct way to measure it is to take the 1980s inflation measure (from before all the medelling to make it artificially lower) and raise rates by 25 bips every quarter until that number is zero, then back it off slowly
Bond prices shooting up is a result of market losing trust in US, or it's ability to not default.
Dollar is famous backed by $700T military. But the world has seen how it failed to secure a strait.
The current US government has broken all kind of promises. I want to highlight two in particular - free trade and immigration.
World economy has benefited for decades on the promises of free trade. The tariffs have eroded the promise and trust.
The government is also openly supporting elements who are hostile to immigrants. Immigrants are the backbone of US economy, has been for over hundred years. Immigrating to the US requires years of preparation, long term planning, and giving up on other luxuries and opportunities. When the government starts breaking promises by changing rules and moving the goalposts overnight, it discourages participation.
> is to ask them what they think the correct value should be
This is Hacker News, we should understand what a PID controller is.
The economy is the "plant". The variable of interest, inflation, is the output of the plant. The government interest rate is the input. As inflation varies around the target FOMC rate, the Fed adjusts the rate. If inflation is over 2%, we should expect rate hikes, regardless of what the current rate is.
This is a fairly simple and very effective system that has worked in most Western countries and the Eurozone since the 90s.
However, note that the "recession" claim is also partly correct: the reason rate hikes work to reduce inflation is that they move the economy growth rate down, in the direction of (but not necessarily into!) recession.
Bring this energetic criticism onto Warsh, whose speech was nauseatingly political in comparison to his predecessor. Paraphrasing ~ “I’m not data-driven, I’m trend-driven”. Frankly speaking, he sounded like a dumbass who failed his way upwards into a position of meaningful power, much like the rest of the government at the moment. Warsh also refused to give a target or a forecast.
The OP that you’re criticizing is simply making a prediction, and he doesn’t work at the fed.
It was hard to watch and ended abruptly. Perhaps the only 2 reporters that kind of ttied to challenge the contradictions in his approach were Nick Timiraos and Michael McKee.
I think that one obvious question that no one asked him was why is the post FOMC press conference is still a thing when he opposes forward guidance and won't even explain what data guides his vote.
A 0.25% rate hike might be the straw that breaks the camel's back. There are a lot of stressors on the economy right now. I don't think it's going to take too many more to tip it. And once it tips, it'll pop bubbles that'll magnify the recession significantly.
One of the more baffling things in the most recent version of that cycle was Biden being solely blamed for inflation - in particular the finger pointing over checks exactly like the ones that went out under trump.
I think this could be the thing that finally pops the AI circular financing bubble, leading to World Depression II. I'm not sure either of the existing 2 faces of the duopoly infesting politics will survive, and there's a non-zero chance this breaks civilization as supply chains collapse, and we enter a new dark ages.
This is very, very unlikely. The US would probably suffer more, given how much AI related expenditure there is. The EZ mostly wouldn't notice, and China is already basically in a depression that it's desperately trying to export its way out of (which seems unlikely without them doing something about all the underwater property debt).
So, their property sector essentially collapsed from 2019-21, vaporising much of the wealth possessed by many Chinese people (who were often buying expensive flats of the plans).
As a result of this many local government pushed money into car/electronics/whatever export industries. This lead to vicious competition, and many of the exporters are tapped out of Chinese markets (vicious competition) so they are attempting to export as much as possible (which is rational).
Looking at things more broadly, one could argue that lots of the reason for the vicious competition is precisely that many Chinese people are still in loads of debt from the property bust (much like Irish/Greek/Spanish people were after their property busts).
The central government is pushing the exporting companies hard, as they don't want to have to inject loads of money into the economy (apart from local support of exporters).
This makes sense from the government perspective as they want to be able to build everything that they need (so the US/EU can't screw them), but it's pretty bad for the chinese people, many of whom are not spending (there's been some deflation over the past 5 years).
So, in many ways the Chinese economy is not in a good state, even lots of the exporters/industrial companies are doing badly, hence why they are focusing on exports.
And because Xi is basically leader for life, the likelihood is that these policies won't change until he dies.
It bugs me that the Fed has no mechanism to really deal with supply-shock driven inflation. Prices are shooting up, but not strongly correlated to money supply at the moment. They’re shooting up because there are a dozen or more entirely capricious and totally self-inflicted supply-shocks due to bizzaro tariff “policy”, disastrous military adventurism, and general erosion of the USD the prime vessel for international trade.
The Fed tightening the money supply isn’t going to materially bring prices down, because the money supply isn’t driving the price increases.
> It bugs me that the Fed has no mechanism to really deal with supply-shock driven inflation.
I mean, what would that actually look like? The Fed is insulated from democratic accountability, for very good reasons, but flipside of that is that their powers are intentionally limited. If they had the same immunity to public opinion but with the power to address supply shocks, that would quickly veer into tyranny.
It's a careful balancing act and there is no perfect solution. What's supposed to happen is that Congress acts on supply-shock driven inflation, but this current Congress would rather eat a bag of broken glass than actually govern, which the Fed can't really do anything about.
What it would look like, at the barest minimum, would be the Fed rightly and with receipts calling out the fact that they’re a monetary policy function, and that the current inflationary problems aren’t a monetary one, so if the U.S. would like something done about its inflation issues, then it needs to look someplace else besides the Fed to deal with it.
It doesn’t have to do anything to monetary policy when monetary policy isn’t the problem. It can do nothing.
It’s not the Fed’s job to try to fix terrible fiscal & trade policy, but that’s now what it’s basically trying to do. So, it’s become a political function by virtue of the political apparatus offloading the consequences of its idiocy onto the Fed to clean up after it with a set of tools that can’t even actually do the job.
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[ 0.22 ms ] story [ 69.7 ms ] threadNot to mention the US debt is _high_ as hell and bond yields mean that's more expensive.
And the country is run by a broken fool who has no interest or ability to fix any of that.
Trump will be gone in three years, but you'll still have an electorate that wants more free stuff while also getting tax cuts. There is zero appetite for fiscal reform in the U.S. The geometric growth rate of U.S. debt has been consistent since 2010 and will remain so when AOC is President: https://usafacts.org/answers/how-much-debt-does-the-us-have/...
The problem is that the top 25% isn’t an “out group” in either coalition. Facebook PMs making a million dollars a year—squarely in the top 1%—are Democrats who don’t want to increase their own taxes. Neither party is politically capable of taxing the group they actually need to tax.
Okay. Then let’s also reduce what’s spent welfare/benefits by a similar amount, at least we’re not taking money they worked for.
The Peak Year (1944): The 94% rate applied to taxable income over $200,000 (which included a 3% regular tax and a 91% surtax). That $200,000 would be incomes over $3.8 Million today.
The High-Tax Era: Top marginal rates remained above 90% for two decades, spanning from 1944 through 1963.
This is supposedly the era that made America "great".
Aside from a brief blip during WWII, federal tax receipts as a percentage of GDP have been stable at around 17% of GDP, going back to 1950: https://fred.stlouisfed.org/series/FYFRGDA188S. Those high marginal rates never actually raised very much revenue. To close the deficit, we have to get that 17% number up to 23%.
To raise revenue, you need to lower the threshold at which high marginal rates kick in so that you actually capture the fat part of the tax base. About half of all income is earned by people making $100k-800k. That’s around where the heavy tax burden falls in every western european country.
Though most of them only for one year due to temporary revenue, so it's not that rational.
Technically it was Besset, but Trump gave him the reigns.
The purpose seems to be to radically debase the dollar and setup a crises that requires an entitlement cut (Social Security) for "the good of the economy" while also expanding military spending at the same time.
The problem is the debt purchased by the Fed during QE had extremely low yields (COVID era) the reserves held by banks created by the Fed during QE now cost more to service by the Fed.
The next few years would be fun.
- I absolutely agree that inflation has nothing at all to do with QE, people who claimed that are just idiots who have a gold fetish.
- the problem I'm talking about is the fact that central banks didn't use QE as an opportunity to erase the public debt it bought. At the time it wouldn't have been an issue in any way. But now because inflation is back (due to oil) central banks cannot buy government bonds when they reach maturity and have to raise rates. Then the government bonds have become very expensive, and it has to be paid to the private sector on the market, so whenever a US govt security reaches maturity, the budget constraint increases. Sterilization of the debt would have alleviated this issue a lot at no cost.
At a minimum, doing so would have created doubts about the future of the dollar. (Because countries that start having the central bank create money to fund the government often wind up in runaway inflation, with the currency becoming worthless.)
As to a 4% target: Given that they were stuck at 0% for the next decade (and tried, and failed, to get up to 2%), why would they move the target to 4%? They already couldn't do what they said, why double their failure?
That's a good point, but it's not as clear cut. The Fed is supposed to achieve the double goal of full employment and price stability and it's not forbidden to make money out of thin air for that purpose, that's the reason why QE is a thing at all. The exact legality of canceling US debt on its balance sheet isn't clear, but:
1. Before 2014 the Obama admin had the power to pass a law making that explicitly legal.
2. There are examples of theoretically valid instruments to achieve the same goal which have been discussed in the period (see the “1 trillion dollar coin”).
> At a minimum, doing so would have created doubts about the future of the dollar. (Because countries that start having the central bank create money to fund the government often wind up in runaway inflation, with the currency becoming worthless.)
Context matters: doing it now would send a disastrous signal, but back in the early 2010s the challenge was to drive inflation up, which is why the Fed used QE in the first place. If anything such a move could have made QE more efficient to achieve its goal (in addition to helping today's public finances, which I argue would have had a stabilizing effect over the long run).
> As to a 4% target: Given that they were stuck at 0% for the next decade (and tried, and failed, to get up to 2%), why would they move the target to 4%? They already couldn't do what they said, why double their failure?
The IMF paper I linked above is pretty clear about the goal of such a measure, but the idea is to have more leeway in case of crisis, because if your inflation is around 2%, your Fed target rate is around 2% as well and you can only lower it by 2% as a stimulus measure, whereas with a 4% baseline inflation rate you have twice the leverage in terms of target rate.
Re the "1 trillion dollar coin": I like your wording: "Theoretically valid". I don't like YOLOing theoretically valid moves in a crisis, only to find out a month later that the courts rule them invalid and you have to unwind them.
I agree, which is why I put “go through the legislative process to make that legal” above. Especially since there was no real emergency. (“in a crisis” though going YOLO may still be worth it though, because it may be enough to earn the time you need to go through the bottom of the crisis. And also if it's very unclear how legal/illegal this is, the fait accompli may be enough to convince the judges to side with your decision in order to put the country in too much of a trouble).
Both sides are to blame - neither will fix the problem. Obama could've made that his goal - he was competent, had a lot of political good will, and many people were frustrated at the bailout policy Bush did, but instead it was inflationary printing (quantitative easing), Obamacare and Cash 4 Clunkers (which the used car market still hasn't recovered from).
I never voted for him - I didn't view him as honest, nor did he seem to indicate that he liked America, but was rather just a good talker - but I think he could've been a great president given a less radicalizing agenda.
He was probably the best situated president in terms of timing to fix the debt problem, but instead it was a good time for divisive politics. By the time Obama finished, it became clear neither party actually cared about the fiscally conservative Ron Paul supporting voting block.
I happen to think the policy was a good idea, and voting to keep it in play was the best vote of John McCain's career ... but it was definitely both radical and divisive.
Now, much of the "mandate" has been stripped away, health care remains a mess, and access is far from affordable, but you can't really blame that one on Obama.
It seems quite ironic, given the frequent complaints about the inability of Congress to either govern effectively or fix health insurance (for many and various definitions of "fix"), that the ACA was so divisive. At least it got passed! Yet given the opportunity twice (2017-2019, 2025-2027), a politically viable alternative hasn't been offered up by opponents of the ACA, let alone being able to fully repeal it.
The thing is, the divisiveness comes from one side - conservatives who were and are determine to oppose literally everything.
— the one side after they fsck the country sideways, every goddamn time.
It's hard to accept the 'everyone is the same' in light of Trump's antics. Remind me again which presidents started wars of choice at the behest of Israel even when they were explicitly warned of the consequences?
Government interest payments, which are already high, will become higher after future bond sales. This will compound future budgetary problems and could eventually lead to cuts in entitlements. If so, expect crime and political instability (already a problem) to rise in the future. This will take a while, though.
Normally rates are increased to lower inflation by reducing the supply of money. Given the multiple concurrent problems with energy (Hormuz, Red Sea/Yanbu, Russia/Ukraine, possibly Libya as problems are starting there, China is buying aggressively) then higher rates may not be enough to stop inflation. This would create a situation where both borrowing is harder and inflation continues to rage. This is very bad and will lead to demand destruction (nobody’s buying anything because it’s too expensive and they can’t finance it anyway). This results in a severe recession at the minimum.
This could be the catalyst to lower prices if sellers get spooked, especially if gas prices keep going up.
That's not to say that rising rates aren't a sign of bad things, the definitely are, it's just not going to make much of an impact.
https://fred.stlouisfed.org/series/fedfunds
It all depends on how long buyers (in aggregate) are willing to hold out, or are unable to buy. And nobody really knows that.
As a buyer you rather want to take out a loan in a high interest rate environment than a low interest rate environment, given that the monthly payment is the same.
1000 usd extra paid towards your mortgage actually makes a difference when the rate is 15% compared to when it is 1.5%
But a lot of people bought in 2024 expecting that to happen.
Higher interest rates mean the monthly payment is higher. You need to pay back the principal + the interest.
House prices tend to be "sticky", so that assumption is probably wrong. People who own a house often cannot afford to sell for the current value since it won't pay off their loan and leave enough money left over for a replacement house so they avoid moving. Eventually things get bad enough that they "sell short", but that takes a credit hit so you don't want to do that until the loss is large (and in turn you gain more).
But if you have a 25 year term on a loan for a $500,000
Approx numbers:
5%: $2922 monthly, total paid: $876,885
10%: $4543 monthly, total paid: $1,353,000.
Given a $1500 monthly payment and a 30 year loan (30 year is most common in the US), at 5% loan is $279,400; at 10% the loan is for 170,900.
If you expect rates to come down soon, you can plan to refinance in the future, but that’s a gamble. Rates may not go down, or the value of the house could go down before you refinance, which may make refinancing more expensive depending on how much you owe.
Paying down a high interest mortgage will always have bigger impact on the dollar than paying down a low interest mortgage.
I’m comparing a mortgage with a high rate and lower principal to one with a lower rate and high principal, where the minimum monthly payments are the same and the owner pays the minimum.
A high interest mortgage just means that you pay more total interest over the life of the mortgage. In any case traditional mortgages are front-loaded, so you pay more towards interest up front than you do principal.
An optional extra payment is worth more when interest rates are higher.
Ie. An optional extra payment of 1000$ will pay your 150$ a year in saved interest when the rate is 15% and only 15% when the rate is 1.5%.
Everything else being equal, optional payments has a higher value, which represent value to the buyer.
Note that the US mostly does fixed rate for life of the loan. Many countries only have ARM (adjustable rates), and those exist in the US as well. If you have an ARM that changes things greatly.
This rate hike is aimed to stabilize the bond yields which in turn will lower the mortgage rates.
If interest rates go up, bonds get sold (for better yield bearing products), pushing the yields of those bonds higher. And it finds some equilibrium. The fact it isn't immediate has to do with short term vs long term bonds. When they mature and the pace of arbitrage.
I don't see how a rate hike is meant to lower mortgage rate. And just looking at the figures shows it's the opposite effect.
Logically, if borrowing money becomes more expensive, how could borrowing specifically for the purpose of buying houses become cheaper.
The fed rate provides a floor for mortgage rates, but the 10 year yield and mortgage demand decide the ceiling. Currently the demand is pretty low, and therefore the yield mostly controls the mortgage rates.
This is logical and empirically observed.
But you are right on the longer term effect. Zooming out: Fed hikes → inflation cools → inflation expectations fall → yields fall → mortgage rates fall.
But the latter is not guaranteed, and it takes time.
I'm unsure to understand how the ceiling and floor mechanisms work. But will dig into that. Thanks.
This part isn’t true. It can happen, but not always, especially right now.
This is highly inaccurate. The 10 year US treasury is a better metric for predicting mortgage rates. We saw this during the past interest rate cuts, interest for loans and mortgages still went up, remember? I do, because I was borrowing at the time. And why was that? Because the 10-year treasury continued going up, and that matters more than short term interest rates. The 10-year treasury is about expectations about the future, so we need to look at how the market responds before screaming mortgage rates will go up, they could actually go down.
The 10 year and fed rates are usually correlated. Occasionally rates spike or dip without moving the 10 year, but these events are brief. This could be a short spike, but only time will tell.
You may notice a few key similarities now with oil embargoes, reduced hiring, an extremely expensive war, and rapidly expanding government debt as a result of that war. If you want a qualitative feeling about people's moods in the 70s, you can watch such movies as:
Taxi Driver The Deer Hunter The Warriors Americathon Network
Counterintuitively the rate hike can help lower things like mortgage rates by stabilizing the bond yields.
It’s a highly non-linear system, many moving parts, people and systems adapt.
It's tough to make predictions, especially about the future!
The country - particularly this industry, information technology - got addicted to cheap cash. Worse, people didn't want to pay any of it back in tax, so bond yields are going to go up on the debt that was issued to cover deficit spending.
Should be interesting to see how this impacts the AI hyper-scalers. They were already burning through cash like a furnace and were running out of people to borrow from, thus the IPO hopes.
looks very similar to 2007-2008 - high rates plus an wide economy segment with very large debt. Now, the interesting question - did anybody "too large to fail" do (or got exposed in some other ways to) leveraged CDS on the hyperscalers bonds and private debt.
If they dont pay it back in tax, they pay it back in debasement of their savings and entitlements
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The counterintuitive part is that a lower Fed rate doesn't necessarily mean cheaper borrowing for the government. The Fed sets an overnight rate; someone lending for ten years cares about inflation and interest rates over those ten years. Keeping short-term rates low won't necessarily reassure that lender. [1]
It also helps to distinguish the government's debt from a giant credit card. Existing fixed-rate bonds keep their agreed interest payments. Higher borrowing costs feed into the budget as old debt matures and gets refinanced, and as new debt is issued. The pain accumulates rather than arriving all at once. [2]
Nor does a larger interest bill automatically require "printing money." Treasury borrowing and Fed money creation are separate decisions. [3]
The difficult question is how to contain inflation without causing more economic damage than necessary. A large debt load makes that tradeoff more expensive; it doesn't make either option painless.
[1] https://www.federalreserve.gov/monetarypolicy/monetary-polic...
[2] https://www.treasurydirect.gov/marketable-securities/treasur...
[3] https://www.federalreserve.gov/faqs/how-does-the-federal-res...
Although it is the third world that is going to take the hit, the wealthy nations will bid up the price of oil to ensure they continue to get it, the poorer nations will be priced out. What is an annoyance in the west -- say needing to delay a major purchase or postpone a vacation or reduce expenses - translates to famine and deindustrialization in the global south.
Maybe it's not such a good idea to be waging war against major resource exporting nations, the US and Europe are now sanctioning about half of the global resource exporting nations, and the only benefit of this is higher prices in our domestic economies and China coming in to sign trade deals for discounted Russian and Iranian oil.
KSA also needs to lay off the Houthis and lift the embargo, it's long past time that they give up trying to control who runs Yemen.
This is how Republicans have a reputation for being economically savvy despite actual evidence to the contrary, because the general population doesn’t understand that economics runs on a time delay.
[0] Yes, I know that the Republicans said that they were going to cut spending to match the tax cuts, but that never ends up happening.
The one thing both parties agree on though is running up a massive deficit
Assuming you're talking about the Senate filibuster, then this can be changed or removed by simple majority vote. It's not in the Constitution, just a rule that the Senate adopted.
Like, personally I think that even sans filibuster, the Senate would move much slower than the House, because of election cycles.
Ultimately the president is enabled or constrained by laws enacted by congress
You might argue it is inflationary.
On an earlier HN economic story, someone provided data showing that this is entirely the responsibility of Republican administrations. Going back to Eisenhower, the Deficit has only increased under Republican Presidents and only decreased under Democratic ones (with one exception, Johnson was slightly positive in Deficit increase).
https://news.ycombinator.com/item?id=49714491
I’ve said this enough in this thread explaining this fact to people saying the same thing over and over so this will be my final comment in this thread
Also you can just reduce taxes (especially corporate ones) AND increase spending, as the deficit suddenly doesn't matter anymore. The important thing is really who's on the girl's soccer team, so there's literally no other party to vote for. Rinse and repeat.
(It moved from 3.5% - 3.75% to 3.75% - 4%, the US uses a range, not a fixed number.)
But this one is something that gets results almost immediately. We will see what it does in 2 or 3 months, not years.
Inflation numbers, companies firing, and the magnitude of fictional numbers on financial markets.
Lots and lots of things are slower to react, but those 3 are quite big and hard to ignore.
Here is data: https://fred.stlouisfed.org/series/JTSLDR
Inflation is a bit higher, but not shockingly so, here is the data:
https://fred.stlouisfed.org/series/CPIAUCSL#
In terms of "fictional numbers on wall street", I don't see any real data there, but if you have access to something then please share.
What means that the US is still paying banks to take loans. They just fixed it so it pays very, very little.
Yes, it happens to both sides. People convince themselves their side always makes right decisions, the other side always wrong.
The truth is that the secret sauce is in the pendulum going back and forth. The excesses of one side are soon erased by the other. It is working, as it has for many years.
I recall reading something from axios or similar, talking about how a CEO said a "nice light recession right now would be perfect for us" or something to that effect.
"this" (raising the fed rate by .25%) is not what causes a recession in 2 years, it's what led to "this" (the ill-advised, badly-planned, Iran war) + tariffs + popping AI bubble that will do that.
And it's how Democrats have a reputation for being the "wrongly victimized underdog / misunderstood savior" despite actual evidence to the contrary, because the general population doesn’t understand that economics runs on a time delay.
Honestly it seems your post is heavy on politics but I am not seeing an actual argument anywhere in there.
My canned response to people being upset at various policies or ratios, whether it is inflation, or bond yields, or market movements, is to ask them what they think the correct value should be. Stop complaining about the movement and instead ask them for their target. You think a 4% FedFunds is too high or too low? What do you think the correct value is and why? You think the stock market is too high or too low, what do you think the correct value of the index should be?
Most people, who were just moments ago vociferously complaining about a movement, when asked this question fall silent, because they have no idea what the target should be, and because they have no idea about the target, they really have no business complaining about movement. Instead, they use the movement as a springboard to air their ideological beefs. But if you are going to tie some thesis to a rate hike, you better be able to explain what you think the correct rate should be and why. I'm waiting.
Personally, I think a 4% rate is perfectly fine. 5% may even be warranted, and historically this has not been a high rate, if you assume, say, 2.5% inflation and 2% GDP growth, this is a pretty reasonable place to be.
There is a separate question though - is that state of the world good or bad for people? Is it better or worse today than it was yesterday? What can we do - collectively - to push it in a direction that best serves our collective interests? These are valid questions to ask, and I think each takes us further in the direction of politics.
So what can we collective do with money so I feel most happy. This may be the most important question of all to ask.
I didn’t see anyone claim a single 25 bps hike will cause a recession.
The 30 day FFR futures (/ZQ) curve is pricing in an 80% chance of two more hikes by the March 2027 meeting and a 70% chance of 3 or 4 hikes by Sept 2027’s meeting. So, 50 bps predicted in the next 6 months and 25-50 bps more within one year.
Source is the CME Fedwatch tool: https://www.cmegroup.com/markets/interest-rates/cme-fedwatch...
I think we’ll need to go to 5%+ within the next two years if fuel costs remain elevated.
Basically you have an inflation shock and you want the reaction function to be higher, so if inflation is 1% too high, you want a 1.5% or 2% rate hike. If inflation is 1% too low, you want a 1.5% or 2% rate cut. The reaction function has to be greater than the deviation from target, but this gives you price stability, it doesn't require a recession, although it may cause a recession.
Using interest rates for this kind of inflation is guaranteed to cause a recession.
How does raising rates hurt mortgage holders? They locked in their interest rate when they got the mortgage?
Maybe find a better canned response? US debt has never been higher, and because of this even rates that are below historic highs can cause economic chaos.
We are seeing asset bubbles across the board in this economy, in housing, in equities, auto loans, etc. It turns out that if you make something cheap, people buy more of it, and that includes the government.
Bond prices shooting up is a result of market losing trust in US, or it's ability to not default.
Dollar is famous backed by $700T military. But the world has seen how it failed to secure a strait.
The current US government has broken all kind of promises. I want to highlight two in particular - free trade and immigration.
World economy has benefited for decades on the promises of free trade. The tariffs have eroded the promise and trust.
The government is also openly supporting elements who are hostile to immigrants. Immigrants are the backbone of US economy, has been for over hundred years. Immigrating to the US requires years of preparation, long term planning, and giving up on other luxuries and opportunities. When the government starts breaking promises by changing rules and moving the goalposts overnight, it discourages participation.
This is Hacker News, we should understand what a PID controller is.
The economy is the "plant". The variable of interest, inflation, is the output of the plant. The government interest rate is the input. As inflation varies around the target FOMC rate, the Fed adjusts the rate. If inflation is over 2%, we should expect rate hikes, regardless of what the current rate is.
This is a fairly simple and very effective system that has worked in most Western countries and the Eurozone since the 90s.
However, note that the "recession" claim is also partly correct: the reason rate hikes work to reduce inflation is that they move the economy growth rate down, in the direction of (but not necessarily into!) recession.
The OP that you’re criticizing is simply making a prediction, and he doesn’t work at the fed.
I think that one obvious question that no one asked him was why is the post FOMC press conference is still a thing when he opposes forward guidance and won't even explain what data guides his vote.
This is very, very unlikely. The US would probably suffer more, given how much AI related expenditure there is. The EZ mostly wouldn't notice, and China is already basically in a depression that it's desperately trying to export its way out of (which seems unlikely without them doing something about all the underwater property debt).
As a result of this many local government pushed money into car/electronics/whatever export industries. This lead to vicious competition, and many of the exporters are tapped out of Chinese markets (vicious competition) so they are attempting to export as much as possible (which is rational).
Looking at things more broadly, one could argue that lots of the reason for the vicious competition is precisely that many Chinese people are still in loads of debt from the property bust (much like Irish/Greek/Spanish people were after their property busts).
The central government is pushing the exporting companies hard, as they don't want to have to inject loads of money into the economy (apart from local support of exporters).
This makes sense from the government perspective as they want to be able to build everything that they need (so the US/EU can't screw them), but it's pretty bad for the chinese people, many of whom are not spending (there's been some deflation over the past 5 years).
So, in many ways the Chinese economy is not in a good state, even lots of the exporters/industrial companies are doing badly, hence why they are focusing on exports.
And because Xi is basically leader for life, the likelihood is that these policies won't change until he dies.
The Fed tightening the money supply isn’t going to materially bring prices down, because the money supply isn’t driving the price increases.
I mean, what would that actually look like? The Fed is insulated from democratic accountability, for very good reasons, but flipside of that is that their powers are intentionally limited. If they had the same immunity to public opinion but with the power to address supply shocks, that would quickly veer into tyranny.
It's a careful balancing act and there is no perfect solution. What's supposed to happen is that Congress acts on supply-shock driven inflation, but this current Congress would rather eat a bag of broken glass than actually govern, which the Fed can't really do anything about.
It doesn’t have to do anything to monetary policy when monetary policy isn’t the problem. It can do nothing.
It’s not the Fed’s job to try to fix terrible fiscal & trade policy, but that’s now what it’s basically trying to do. So, it’s become a political function by virtue of the political apparatus offloading the consequences of its idiocy onto the Fed to clean up after it with a set of tools that can’t even actually do the job.