The Fed’s imminent interest-rate decision – Is America ready for lift-off? | Hacker News Reader

The Fed’s imminent interest-rate decision – Is America ready for lift-off?

economist.com

33 pointskevindeasis56 comments

I am feeling sad about this. The USA economy is clearly weak by any of its own measures, and there is the likelihood that weakness in Europe and China will further weaken the USA. Inflation has been subdued for years and has recently declined further, so there is absolutely no justification for a rate hike. Labor participation among prime age adults remains lower than before the recession. And yet the Fed seems absolutely determined to raise rates, even though there is no conceivable good that can come from this action.

Edit:

Please see:

http://marginalrevolution.com/marginalrevolution/2015/12/eco...

What more, the Fed (Yellen) keeps teasing a rate hike every few weeks or so, and has been doing so for months, only to never follow-through.

Every time they tease it then don't act, the market takes a plunge.

> Every time they tease it then don't act, the market takes a plunge.

Pretty sure the order of events is flipped. Last few fed meetings have been preceded by one sort of terrible economic news or another. (Last time it was the China slowdown.)

They've been indicating for a while that they would raise rates sometime in the second half of 2015, but it's been pushed off because raising rates when markets are weak could instigate an economic meltdown.

Before I thought it should be obvious that the stock market would go up when rates drop, and vice versa. But I remember one day about 1-2 months ago, the market plunged after the Feds said they might hold off on raising the rates and there wasn't any new bad economic news for a week.

All over the news, pundits blamed it as a sign of weakness because the Feds didn't ignore the stock market chaos. And now the stock market is dropping again because a rate increase is becoming likely again.

Whether or not rates go up or down, the direction of the stock market seems to be controlled by emotion or big investors that have access to secret information. Retail investors like us seem to be powerless and doomed to just hold our stocks while waiting for a recovery that could take decades to occur.

You've got that backwards - a rate hike has a downward impact on equities, because they are priced in dollars.

Yes, it looks like my observations were a little off.

What looks more accurate is Fed teases rate hike, market plunges for un-related reasons, so Fed doesn't go through with the rate hike... and the cycle repeats.

> Every time they tease it then don't act, the market takes a plunge.

The market keeps plunging on expectations, and then rebounding after they don't raise interest rates.

> Inflation has been subdued for years and has recently declined further

The reality is the free ride on inflation can't last forever and if the Fed fails to predict the future it can get pretty grim.

Similarly, there are a number of bubble like portents such as resource prices that are showing an excess of capital is being malinvested.

Its just one of those situations where you have to hope the professionals predict the future correctly.

> Labor participation among prime age adults remains lower than before the recession.

https://research.stlouisfed.org/fred2/series/LNS11300060

Its pretty clear the 90s it leveled off and now its dropping. It peaked 15+ years ago. It has nothing to do with the recession but rather, frankly.

I know it seems that way from the media but the fact is it leveled off ~25 years ago and began to drop ~15 years ago. The difference b/t the highest point and 1990 is very similar to normal noise.

From that chart and from what you're saying, it sounds like the labor-force-participation element isn't necessarily bad -- although we certainly do have malaise from other sources.

(In particular, there's how the dot-com bubble's about to burst again, for the second time in a generation. "Learned nothing and forgotten nothing," that's us...)

>The reality is the free ride on inflation can't last forever and if the Fed fails to predict the future it can get pretty grim. >Similarly, there are a number of bubble like portents such as resource prices that are showing an excess of capital is being malinvested.

The thing is it's really easy for the Fed to slow the economy down, it's a lot harder to get it started again. So it makes sense for them to wait until they actually start seeing inflation before they decide to raise rates.

It's hard to say whether the mal-investment is due to the current monetary policy or the lack of better investment options in a bad economy.

FWIW, the participation rate for the wider population shows a more significant drop around 2009:

https://research.stlouisfed.org/fred2/series/CIVPART

This might be due to early retirement, or more young people not finding work. I don't research this data much.

> It's hard to say whether the mal-investment is due to the current monetary policy or the lack of better investment options in a bad economy.

Its probably both, honestly.

> > Inflation has been subdued for years and has recently declined further

> The reality is the free ride on inflation can't last forever and if the Fed fails to predict the future it can get pretty grim.

The Fed didn't actually care about inflation. It cared about avoiding a depression. And it did pretty well after 1940. The recessions were becoming progressively less severe, IIRC. Unfortunately, inflation was growing. In 1981, Reagan and/or events forced the Fed to get serious about inflation, and the result was the double-dip recession of 1981/82. Since then, inflation has been steadily declining (that is, the peak in each cycle is lower than the peak in the previous cycle). However, recessions have been growing more and more severe.

Maybe there's some kind of a restriction on economic management/control: You can minimize inflation, or recession severity, but not both?

With monetary policy, yes.

Fiscal policy was supposed to be the other component which is what Bernake kept saying when he was chairman when talking to Congress...the Fed really only has one knob it can turn in a very, very extensive machine.

Federal debt via stimulus is far lower risk than the Fed attempting to control recession severity.

Many blame the Great Recession on Greenspan because he kept rates too low and over-inflated the housing market.

It's almost impossible to judge the timing of these things beforehand, but 0% interest (free money), and Quantitative Easing (printing money) is bound to cause problems if it continues too long.

The far more significant cause of the Great Recession was outright fraud. Watch https://www.youtube.com/watch?v=ClfBxWPkBKU and other videos featuring William Black (a former bank regulator from the S&L crisis days).

This is not a consensus view by macroeconomists. While fraud may have been important, and possibly more important than macroeconomists believe, I think you do a disservice to the HN reading community by not acknowledging the vast body of experts who have already tried to answer the question of what caused the Great Recession. It's a very difficult question to answer convincingly, given that we cannot run multiple trials to see any counterfactual scenarios. I think any attempt at an answer should be presented with humility and caution and nuance.

Wikipedia discusses a bunch of factors related to the Great Recession, correctly mentioning that different economists place different weight on them: https://en.wikipedia.org/wiki/Causes_of_the_Great_Recession

Here's a video by Tyler Cowen that discussions the Great Recession in terms of four DIFFERENT macroeconomic models: http://www.learnliberty.org/videos/explaining-the-great-rece...

Lastly, I'll say that even talking about causation generally is difficult. If someone buys a gun and shoots me, what was the cause of me getting shot? If guns had been outlawed, I wouldn't have been shot. Is it Congress's fault? If the shooter hadn't pulled the trigger, I wouldn't have been shot. Is it the shooter's fault? If I hadn't failed to jump out of the way, I wouldn't have been shot. Is it my fault? Defining causality when there are many serially dependent steps is not easy. So when someone asks, why did the Great Recession happen, it's hard to even know what the question means. Feynman has a famous interview segment where he talks about the difficulty of answering 'why' questions: https://www.youtube.com/watch?v=Dp4dpeJVDxs

> If guns had been outlawed, I wouldn't have been shot.

Murder is also illegal. In your hypothetical scenario, you're assuming the shooter was willing to break the law to murder you, but would not have been willing to use an unlicensed gun to do so?

I think you understand the point I'm trying to make, so please be charitable. Let's assume this shooting was one of those marginal cases that would have been prevented by outlawing guns. Of course outlawing guns does not prevent all shootings.

>The USA economy is clearly weak by any of its own measures

I'm sympathetic to your greater point about keeping interest rates low, but it's simply not true that the US economy is weak by any of its own measures. The US economy is strong by many of its own measures:

US GDP is at its all-time high, $18 trillion. It has NEVER been higher.

The S&P 500 is near its all-time high, sitting around $2,000. Before last year, the S&P 500 had NEVER been higher.

For the past six quarters, US real GDP has been growing at about 3.0% annualized, far faster than the historical 1.9% annualized that the US experienced from 1860 to 2007 (a time period over which technology improved massively and the US became a global superpower).

US unemployment is down to 5%, back to the levels during the pre-recession boom.

By many, many measures, today's US economy is the strongest economy that humankind has ever seen. Certainly, the US economy is not as strong as it could be. And certainly, it would be nice if more people were employed. But overall, the US economy is doing better than ever.

the unemployment is what the government makes it out to be, the number employed is a better measure. when you look at the number who could hold jobs or full time jobs where they do not the number doesn't look that great (this means, avoid that silly number some like to throw out of ninety plus million as that includes retirees and college kids)

I'm not really convinced by this argument. If more families than ever can send their kids to college (I.e. four year vacation), instead of working during that time, how is that a bad thing? Is it better if disabled people are trying to support themselves instead of being out if the workforce and being in SSIDI?

One word: Arms-race.

If everyone has to signal what percentile of competence they are, and you offer cheap loans to people who provide a certain signal, then everyone will start having to buying the service that send that signal. People are collectively blowing a lot of resources to signal the same thing (and irrespective of how much they value having such a vacation).

Scott Alexander provides a great exposition of that dynamic in "Against Tulip Subsidies": http://slatestarcodex.com/2015/06/06/against-tulip-subsidies...

A benchmark doesn't have to be perfect in isolation to be valuable relative to previous measurements. Has something changed about the economy to break this metric?

S&P is measured in nominal dollars, so of course it is near its all-time high. It should almost always be at its all-time high just because of inflation. So this doesn't tell you much.

Sure, ok. But even adjusting the S&P 500 for CPI inflation, it's near all time highs. And if we're going to be careful, you have to also take dividend reinvestment into account, which has the opposite effect of inflation. Neglecting dividend reinvestment will cause indices underestimate the true growth of a dollar.

Here's a quickly Googled source showing CPI-adjusted S&P 500: http://www.multpl.com/inflation-adjusted-s-p-500

Here's another quickly Googled source showing dividend-reinvested S&P 500 returns: http://www.indexologyblog.com/2013/08/08/inside-the-sp-500-d...

I wish I could find a decent source that incorporated both effects.

The US economy has been weak despite all of the stimulus. Respectfully, why would continuing policies that are meant to counteract emergency conditions help?

The fact that monetary stimulus (a fairly weak tool; fiscal stimulus, which is Congress' domain, is the stronger tool) is insufficient to move things as far in the right direction as desired does not imply that backing off on monetary stimulus would fail to move things in the wrong direction.

Not sure I follow? The Fed has added +/- 3.6 Trillion to their balance sheet since the start of the great recession.[1] Excess reserves for banks went from 0 to +/- $2.5 Trillion during the same period. [2] The FED arguably brought us back from the brink but I would think that those emergency measures are for emergencies not to be used because things are "weak" but when things are on the "abyss". One person's opinion.

[1] https://research.stlouisfed.org/fred2/series/WALCL [2] https://research.stlouisfed.org/fred2/series/EXCSRESNS

Stimulus isn't a switch you flip on and off. The idea that if you flip it, and the economy doesn't take off then stimulus doesn't work, is not a sound idea.

You can have stimulus in different forms, different points of time, and different levels.

So why would continuing policies meant to help? Because discontinuing them would have a significant detrimental impact.

Based on this point of view, stimulus and monetary policy have no effect, so the financial crisis should have been left to run its course. That would have been a terrible outcome, and we would be worse of than we are now.

My point is continuing extraordinary measures for seven years is contra to what these measures were initially articulated to address (e.g. emergency conditions != weak conditions).

The Fed is in a jam, though, because it faces asymmetric risks. If it raises rates too soon, its scope to cut them, should the economy then sour, is limited by the fact rates cannot fall far below zero. If it waits until inflation is stronger, it has unlimited capacity to raise rates to tame it.

This to me is the key paragraph. Why not wait until we reach or exceed target inflation, when they risk tanking our still very fragile economy, and then being unable to do anything about it since rates would still be close to zero?

Because we will have a recession sometime in the next couple years, and if the Fed keeps interest rates at 0, it will have no ammunition when the time comes.

Raising the rates prematurely, you risk accidentally triggering a recession or weakening the economy, then you're forced to raise rates to prevent a recession caused from prematurely raising rates.

Interest rates aren't something you can slowly raise without effect.

The economy is the strongest it's been in 5 years, and you can't keep rates low forever.

It will be very interesting how this plays out. We are in rather unexplored territory. On one hand raising interest rates could spook the stock market which would reverberate through tech. On the other hand without room to lower rates the Fed would be without it's best tool when the inevitable next recession arrives. Seems like slowly raising rates is the best course.

What is interesting about this whole thing is precisely the second point: Are interest rates really the best tool to alter monetary policy? What's the real transmission mechanism by which anything the fed does affect the economy.

The view I'd most like tested is Scott Sumner's, who thinks that there's no such thing as running out of ammunition while trying to provide monetary stimulus: If a central bank wants to create inflation, all they had to do is print money and actively spend it, buying bonds, stocks, anything. It's not what a majority of economists believe, but at the same time, his model is very predictive. Unconventional monetary policy, like what Japan has been doing, has changed indicators in Japan in ways that decades of traditional intervention failed to do.

Either way, there's been so much talk about rate raising, that unless we think markets are very bad at prediction, I'd be very surprised much changed in the market if rates moved up a quarter of a point: The uptick has been priced into the stock prices already. It'd be news if it didn't happen.

I wouldn't say you'd want to throw printed money into any asset class; you're just going to create a bubble somewhere.

I'd advocate for printing it and dropping it in everyone's checking account. It creates immediate economic activity by people who are going to go spend that money today.

Isn't that inevitable with any sort of plan to stimulate the economy? Seems like there will always be some sort of bubble(s), and that it is impossible to ever reach equilibrium or a smooth state.

No. The Fed buying stocks and bonds doesn't increase the price of anything else very much. Not very many people buy cars because the stock market went up. But if you hand out money to actual people (basic income, maybe?), then some will pay down debt, and some will buy stuff, and some will do some of both. But those who buy stuff increase the demand for stuff, which means people have to make more stuff, which increases the number of jobs, which means that more people have money to spend, and hopefully the economy improves on a sustained (non-bubble) basis. (It also cuts down on the amount of bad debt, which is helpful to the economy as well.)

The Fed buying stocks, on the other hand, does not increase jobs in any meaningful way. It just raises the prices of stocks. People with money then want to be in stocks, because the prices are going up. But they aren't buying stocks because the fundamentals are better; they're buying only because the price is going up. And their buying pushes the price up further, so more people see the price going up, so more people buy, and away we go. "Price going up disconnected from the fundamentals": that's a basic definition of a bubble. Add in the positive feedback loop of people wanting to buy because the price is going up, and it's definitely a bubble.

I'm very interested how bad the fallout is going to be on the S&P when the Fed ticks up interest rates. If today's market activity was any indicator, hold on tight.

Seconding this, but for the Bay Area real estate market. My theory is that raising rates will reduce the number of people in the market because money won't be as cheap, however what I'm not sure of is the sheer massive amount of demand from people with money (investors and highly-paid techies) and whether it will be enough to cancel it out.

As someone who bought earlier this year I guess I'll see. Sure as heck hope it keeps going up for a bit more.

They keep talking about raising rates based on the notion the markets and economy have more than fully recovered, which is not entirely true (we just didn't like the old metrics so we changed how we measure things)[1].

It feels dangerous to change rates based on flawed data points (and also makes the Fed Reserve look to be playing partisan politics to help spin the narrative of "everything's fine").

[1] http://www.huffingtonpost.com/2013/07/19/unemployment-rate-w...

Raising rates it a good thing:

1. It allows the Fed room to maneuver during the next recession (https://en.wikipedia.org/wiki/Zero_lower_bound)

2. It will all investors to normalize their portfolios (http://blogs.wsj.com/moneybeat/2015/09/11/what-to-ask-before...)

3. Savings accounts and fixed income will actually yield interest.

The US economy is actually in pretty good shape:

- Job creation has been solid (http://www.bls.gov/news.release/pdf/empsit.pdf)

- Unemployment has been declining for 5 years (https://research.stlouisfed.org/fred2/series/U6RATE <- U6 rate, includes under-employed and those who quit looking for work)

- GDP is 20% higher than before the recession (https://research.stlouisfed.org/fred2/series/GDP https://research.stlouisfed.org/fred2/series/A191RL1Q225SBEA)

- Average pay is increasing (https://research.stlouisfed.org/fred2/series/CES0500000003 all workers, https://research.stlouisfed.org/fred2/series/AHETPI not including supervisors)

What I haven't been able to find out is how an interest rate hike by the Feds will change consumer borrowing (mortgages, cars, etc.).

If the rate is going from 0% to 0.25% for the Fed loans, does that mean consumers will not see a rate hike, a rate hike of 0.3%, or multiples of that?

As the article says, most American mortgages are on fixed rates. You may see an increase in rates for non-mortgage borrowing.

Rate hikes have been "imminent" since QE1.

> If the Fed has been a bullish coach, the markets have been trusting fans, continually believing that an increase is imminent, only to have their expectations dashed. At last, however, the moment seems to have arrived. On December 16th, when the Fed’s rate-setting committee meets, it seems all but certain to raise rates.

That's what the media said last meeting.

For what it's worth, the Fed Funds future markets are priced at a predicting a ~70% chance of a rate hike.

This story has been "The Boy Who Cried Wolf" for more than the past year. Every 4 weeks they threaten and no change.

I'm hoping they finally move, because rates have been too low too long. Yes I realize this is likely the worst time to raise rates in the past 5 years, but that's only because they waited too long.

"too low too long"

Is there something inherently wrong with being low for a lengthy period of time? "Too low" is obviously bad (if true - my understanding differs, but I'm no expert), but is there any concern over "too long" if "too low" isn't true? (honest question - is a too stable rate itself a problem?)

On to the "too low" part - My understanding is that Fed targets 2% inflation, and we've just not been there. Do you have reasons other than gut instinct to dislike the low rate? (Again, honest question, my understanding could very well be wrong).

I think that rising house prices in many parts of the world are directly connected to low rates.

In general (over the last century or so) house prices have kept pace with inflation.

It appears that with really low interest rates, property has become a good investment for the pools of capital sloshing around looking for a return.

It would be my hope that increased rates could redirect some of this capital back into bonds and other non-property investments, which would be good for many people who are looking to buy houses.

This is totally just a speculative theory though, I haven't really investigated the matter in detail.

In fact, the problem has been that rates aren't low enough, they are united by the zero lower bound. The natural interest rate would be several points in the negative.

In what universe could interest rates ever be negative and considered "natural"? Or even a zero interest rate being considered "natural".

If you believe that to be true, what rational entity would take the risk of loaning out money to either lose money or get back solely their principal at some future time?

And considering prices are inflating, this makes zero and negative interest rates even worse. Market interest rates reward the savers by risking their capital and loaning it to borrowers who can put that capital to work and pay back the lender both principal and interest.

Sorry, autocorrect. That was supposed to be limited by the zero lower bound. You can't get below zero (or not much below anyway).

Reminder, someone at the Fed thought negative rates in 2015 and 2016 were appropriate:

https://marketrealist.imgix.net/uploads/2015/09/Sep-dot-plot...

I'm not saying it was Yellen... But it was Yellen. If they were looking to shock-and-awe this market, talking hike and then going negative would do it.

I have no idea what is going to happen.

Well negative interest rates could be appropriate for negative economic growth. So if we never allow for negative interest rates we never allow for negative economic growth. But if we ever want to achieve singularity, we have to allow our economy to shrink to (zero).

Reply on news.ycombinator.com