Fed’s Powell expects inflation to stay hot for months | Hacker News Reader

Fed’s Powell expects inflation to stay hot for months

politico.com

26 pointskoolba76 comments

I'm reminded of this famous passage by Ernest Hemingway in The Sun Also Rises:

> "How did you go bankrupt?" Bill asked.

> "Two ways," Mike said. “Gradually and then suddenly."

In other words, at all times, Mike's march to bankruptcy was always obvious, but somehow he couldn't see it, or do anything about it, until it was too late!

If you read accounts about inflation in the mid to late 1970's, you'll see that by the time inflation started getting out of control, it was too late to prevent it. Inflation couldn't be brought under control until Paul Volcker aggressively raised interest rates, which was very painful for a lot of businesses and a lot of people. 10-year treasuries hit 16%/year. Mortgage rates hit 20%/year. Valuations for all kind of assets hit rock bottom.

It's not too hard to imagine the following Q&A a few years from now in some congressional hearing:

> Q: "How did inflation get so out of control?"

> A: "Two ways. Gradually and then suddenly."

The U.S. went off the Gold standard in 1973 and had different fed policy back then, is my understanding. I highly doubt "it was too late to prevent it" back then or that there are lessons to be learned from that incident or the fiction novel you quoted that apply today.

The US ended gold convertibility in 1971, not 1973.[a] The precipitating factor was actually OPEC's oil embargo from 1973 to 1974.[b] At the time, conventional economic wisdom was that there was a trade-off between employment and inflation, according to the Phillips Curve.[c] So, as higher inflation (and inflation expectations) started getting more and more embedded into the economy (e.g., stipulated in rent contracts), everyone could see what was happening, but everyone sort of kept waiting and hoping for things eventually to "go back to normal," so no one did anything... until Volcker came along and fought the establishment, causing a lot of pain, to get inflation under control.

[a] https://www.stlouisfed.org/open-vault/2017/november/why-us-n... -- also, see tastyfreeze's comment: https://news.ycombinator.com/item?id=27833523

[b] https://www.federalreservehistory.org/essays/oil-shock-of-19...

[c] https://www.stlouisfed.org/open-vault/2020/january/what-is-p...

I imagine you'd agree the U.S. has different monetary policy in the 1970s than it did today. I recall an expert say because the monetary policy has changed, discussing the 1970s isn't useful. I don't believe there's any question we have a different monetary policy today than we did in the 1970s.

The bond market is not predicting high inflation. I believe experts would say the 1970s are not relevant. So that's where we are.

The bond "market" is dominated by Fed purchases (with money created out of fresh air), to keep borrowing costs low (aka QE). They are following the BoJ, which now owns around 70% of all government bonds. This charade can continue for a while longer, but what happens when governments own 100% of their own debt and all mortgage debt (MBS in the US)?

Instead of relying on my own "ideas" on economics, a field I have no training in, I would simply stick to one of the two sources cited here for inflation predictions:

" There are two popular methodologies for predicting inflation. The first is to rely on the Survey of Professional Forecasters, the oldest US survey of macroeconomic forecasts by economists, and the second is to rely on the breakeven rate, the spread between the US Treasury yield and the yield for TIPS, as a measure of market expectations."

https://mailchi.mp/verdadcap/on-inflation?e=3cd9e40509

> The bond market is not predicting high inflation. I believe experts would say the 1970s are not relevant.

I think it is at least partially relevant that no one working in bonds in 2021 was working in bonds in 1971/1973 period discussed here. It is fun to talk about these past periods but it is very much theoretical for most traders and lessons are hard to remember in your own lifetime let alone from the lifetimes of predecessors.

I encounter this constantly in my profession, which is also heavily reliant on valuation and interest rates. No one in my field today has direct experience of rising interest rate environments since rates have been on a continuous decrease for decades. Even older folks that remember double digits rates still act as if rate can never go up again. They throw caution to the wind. As a result, the market is incredibly susceptible to issues if rates ever do go up. It is mind boggling.

The US went off the gold standard in 1933. Citizens could no longer redeem certificates for gold. The Bretton Woods Agreement was broken by Nixon ending gold convertibility in 1971.

The gold standard required government to have more gold to have more money. The gold standard was ended because it was a restraint on government spending.

It's interesting to me that the bond market is so complacent about this. They view inflation as a slain dragon. Inflation stays low because people in the past expected the fed to react aggressively to the slightest sign of inflation. Bond investors refuse to demand higher yields (i.e. by not buying treasuries) because they expect inflation is temporary.

Here's the thing. Does anyone think that today's fed stands ready to plunge the economy into a deep recession like the 1980's to kill inflation if it gets out of control? Anyone? I have no such faith.

I think the fed, and the market, are basically under the belief that inflation isn't going to sustain at above 2% for long.

I mean, look at it from their side. They've been doing everything they can think of to hit 2% for a decade without success. Now, after the pandemic everyone is rushing back to work on a massive scale never seen before (plus some fiscal spending with additional unemployment benefits are still out there) and inflation is what, maybe 3% over two years if you are super generous with the numbers.

They are basically just in "wait and see" mode to know if this inflation trajectory has staying power.

Yeah, I am sympathetic to people concerned about inflation right now, but the basic Econ 101 explanation you give is just too compelling to alarm me (and apparently the Fed and others who do this for a living).

There is a clear mismatch in demand and supply. Supply is booming and its taking time for supply chains to catch up because of the structural damage that was caused by COVID. It takes time to fix that. This is short term angst, not a monetary crisis.

If there's a monetary crisis occurring (asset inflation?) its been going on for almost a decade now, and its not reflected in the CPI.

You can see how much the Fed has been propping up the economy in the M1 money stock chart [0].

They've been injecting so much cash... that's a lot of fucking money. I think when they slow down, the market will crash. Money needs to be in circulation, and this is the only way they can get it to circulate (although, tbh, if it were in the pockets of the people, it'll probably circulate better).

You can also check the velocity of money in the M2 velocity chart [1], which shows the ratio of transactions to the M2 supply. The M2 supply is the M1 supply plus some other forms of money. What the M2 velocity chart shows is that people are holding on to their money in some form and not transacting with it as much as they have before (i.e. a slow down in the velocity of money). Like, it's getting close 1!!!!

So all that cash that the Fed's been injecting hasn't been able to speed up the M2 velocity back to pre-COVID times let alone pre '08 recession times.

The velocity chart doesn't look too good IMO.

[0]: M1 money supply https://fred.stlouisfed.org/series/M1SL

[1]: M2 money velocity https://fred.stlouisfed.org/series/M2V

Yeah, except a huge portion of that increase isn't even circulating. The only increase in circulating supply has occurred at the behest of the Trump and Biden administrations, via fiscal stimulus.

As evidence for this, reverse repo operations (in which banks who have way too much excess reserves buy the Fed's assets overnight) are running close to a trillion dollars(1).

Meanwhile, credit offered by banks appears to actually be shrinking.

So Wells Fargo, for example, is over here sitting on more cash than it knows what to do with, and killing ~4% NIM consumer LOC facilities(2) while buying 0.1% NIM in overnight operations.

I don't know if banks think default risk is rising above 3.9%, or if demand for credit is low. But something fucky is definitely going on since February.

1. https://fred.stlouisfed.org/series/RRPONTSYD

2. https://www.cnbc.com/2021/07/08/wells-fargo-is-shutting-down...

> You can see how much the Fed has been propping up the economy in the M1 money stock chart [0].

The change in M1 was a change in tracking rules, as explained in the Fed weblog post:

* https://fredblog.stlouisfed.org/2021/01/whats-behind-the-rec...

Bond markets seem to be shrugging off inflation concerns. Persistently low rates indicate a higher concern about sustaining growth than overheating economies.

Consumer price inflation won't rise unless a relevant proportion of consumers get more money to spend. There should be enough slack behind all goods in the cpi basket that disruptions won't permanently affect the price of milk, bread, toilet paper, flat panel TVs and so on.

It is true that there is exploding inflation in asset prices brought by central bank credit, but it won't affect the price of milk and bread.

The demand for those things is fixed. Even TVs—everyone’s already upgraded to 4K. It’s discretionary items, like cars, housing, renovations, luxury appliances, and elite schools, that will experience inflation. Human wants are infinite.

Yes, probably true.

Those (cars, housing, renovations, education) are things financed by debt and can continue rising. But I suspect they are conveniently down-weighted from the CPI.

For example, if they let the CPI-entry be monthly car payments instead of cash price, then CPI inflation is flat as long as rates are falling.

typically the US would raise interest rates to combat inflation, however the federal reserve has refused and cited this to be "transient" inflation, an assertion thats really more wishful thinking.

the real reason the fed cant raise interest rates is because it never gave up quantitative easing after the 2008 housing collapse. raising interest rates would blow up the corporate credit bubble.

https://en.wikipedia.org/wiki/Corporate_debt_bubble

>Both the Fed and the Biden administration have said rapid price increases are being stoked by temporary factors, such as hiccups in the faster-than-expected reopening of the economy.

Or the fact you pumped a load of unnecessary money into the economy via "stimulus" checks and "relief" packages.

The US has been printing money and dumping it into the economy since 2008

The existence of prior bad policy doesn't negate continuance of bad policy. If we were speaking about the prior administration, the same point would apply. This will have significant impact on several generations to come.

Yep and it's stupid. That directly causes inflation. This is why people are jumping to cryptocurrencies and don't trust fiat currencies anymore. Luckily our amazing government has now decided we should tax crypto since they screwed up their own currency so badly.

This last year is way off the charts.

Completely disagree that the stimulus checks were unnecessary, and I'm really curious what you think a superior solution to the COVID economy would have been.

I think people take for granted that our economy could be in a much, much worse position right now given the events of 2020.

The third one went out after the vaccine was widely available. Honestly with expanded unemployment benefit we didn’t even need the second one.

After the stimulus checks I saw a lot of television boxes out at the curb when it was trash day. YMMV

The stimulus checks made sense when people simply weren't allowed to work. I lean very right with my fiscal opinions and I can understand why we stimulated since government (with no choice!) created the quarantine issue, and people needed to eat. But now, with so many open jobs and no one willing to fill them, they should not only cut the stim checks but cut back on other forms of assistance to force people to go out and work and learn new skills. Until this happens, inflation will keep rising.

Wages haven't kept pace with productivity since the 70's, largely because of a lack of leverage by employees. Inequality and stagnation have been causing significant pressures, arguably causing the surge in populism in 2016. Why not let employees have leverage for a while?

>Completely disagree that the stimulus checks were unnecessary

They were completely unnecessary for a LOT of people. I can guarantee almost no one on HN needed a stimulus check. If you were working a white collar job remotely you did not need one. Those checks should not have been given to anyone that was still employed through this. It was all a political game to garner votes.

>I'm really curious what you think a superior solution to the COVID economy would have been.

To not shutdown businesses that needed to be physically open to survive. You really think those checks helped out all those small restaurants/bars/etc. that weren't even allowed to be open during all of this?

Additionally, they sent a bunch of money to other countries so we'll get to pay for that as well.

>They were completely unnecessary for a LOT of people.

Totally agree here. They were unnecessary for me and a lot of people I know. But if we're talking about stimulus checks as a whole, I think they were beneficial to a lot of people out there who were out of jobs or had their hours cut drastically.

Right but they went out to everyone regardless of whether they were fully employed. This is unnecessary money being injected into the economy which results in inflation.

Also, as someone else mentioned the people who did need the checks were also being covered by other forms of welfare by the time the last one went out and you still have people getting checks that could easily go back to work now but are choosing not to.

Maybe I misunderstood your first comment. It appeared to me that you were criticizing the stimulus checks as a whole, rather than just the number or size of checks that were sent out. If we're only talking about changing the number and size of checks that were sent, I assume there was room for improvement.

reminding all: inflation is large and great tax on each person. wealth tax by other name. but worse for the poorer, the persons who have no money manager and investing wisdom for the avoidance of inflation effects. inflation from monetary policy like the fed currently is a bad thing.

Inflation also decreases the value of debts, doesn’t it?

Debts always have greater interest rates than the inflation.

Your statement doesn't apply to long-term debt like mortgages with fixed interest rates.

That doesn't matter. No matter what the nominal rate of interest is, higher inflation will result in a lower real interest rate.

Edit: This is regarding debt that already exists, not newly issued debt.

Even the US government's?

This isn't true. For example, current UK government bonds (denominated in £) have a yield of 0.674%, but inflation even before the post-covid increase was around 1.8%.

While in theory what you say is mostly true, it's not really true in reality. The EU govt issued bonds that produce negative real interest rates in 2020. The US Govt let their treasuries hit 0% interest.

bond/debt interest rates are usually fixed at the time of purchase. When you buy debt you know exactly what you will get at the end(provided the person/entity in debt doesn't default). You don't know what the inflation rate will be at the end of the bond when you get the principal back. You can make a pretty good guess, but you can't know.

It typically doesn't ever change, so if you bought a 4% yielding bond, then inflation hits at 5%, then you WILL lose money on your bond. This is normal in a rising rates/inflationary environment.

Bonds are "safe"(for some definition of safe), and you have to pay for safety.

US Treasuries pay next to nothing(and generally always have) because they are the reserve asset, everyone in the world considers them safe debt. FDIC insured bank accounts similarly get away with paying basically no interest on the deposited money.

Safety costs you. Holding cash means you are generally going to lose to inflation.

The only exception really are TIPS, I-Bonds and other inflation protected bonds. But that's only if you how they define inflation is also how you define inflation.

Right now Inflation is like 5%, but a lot of that inflation is from things like buying cars, or in the recent past lumber. If you aren't currently buying those things, then those inflationary pieces don't really apply to you. So your personal inflation rate might be 2% or .5%, it just depends on what you are buying.

Anyways, bonds are complicated, and debt even more so. At the moment you can get 30yr mortgages(debt) under the current 5% inflation rate.. does that mean owning a house with inflation is a good deal.. MAYBE.

(1) Mortgages currently have LOWER interest rates than inflation. Right now inflation is above 5%, and I know people who refinanced below 3%.

(2) It doesn't matter too much in either case. If I took on a debt 5 years ago, and I'm paying $500 per month, if we see inflation will mean I'm paying half of that.

Inflation is really good for people (and governments) with excessive debt. If your net worth is negative, inflation is a tax on your debtors, not on you.

This is depending on terms of a loan, most loans trying to price in inflation costs with higher interest rate. Maybe with surprise inflation on fixed terms loan?

Inflation does decrease the value of debts. That only matters if the borrower has a non-inflated asset to pay off their debt. Most people earn in dollars which will decrease in value at the same rate as their debt. Earning the same amount of dollars with inflation means more of earnings go to paying for life and less to go towards debts.

Now, lets say you have a gold bracelet and inflation only cuts the value of the dollar in half one time. The gold bracelet can be sold for twice as many dollars that can be used to pay off debt.

One halving is a mild inflation scenario. Romania in the 90s went through 14 halvings.

They’re letting inflation run hot so workers in sectors hit hardest by the lockdown can recover. These are generally blue collar / service jobs more likely to be held by women and POC.

Already we have more $$$/liquidity than is usable for economy, see storage way up in overnight reverse repo, see investing more in junk debt... no places for to put these $$$, more $$$ no solution.

> These are generally blue collar / service jobs more likely to be held by women and POC

I am not understanding salience of this part?

Women and POC tend to be poorer on average.

Indian and Filipinos Americans earn significantly more than “white” Americans on average.

"Let's print more money so that more people have money."

The Fed is absolutely doing this for poor workers, and not to enable sustainable deficit funding without raising taxes. /s

The Fed doesn’t control taxes, Biden has stated he won’t raise taxes on people making less than $400k, and the GOP has indicated that raising corporate income taxes are a no-go. Realistically what other options are there?

Ostensible the Fed is supposed to be an independent inflationary guard. (Yes, dual remit, but fair as a blanket statement)

They could raise interest rates to break inflation, even at the cost of economic pain and forcing government to rebalance its books.

Nobody was happy with Volcker, but once inflation gets rolling, no one believes you're serious until you take a tire iron to the economy's kneecap. And tell them (loudly) that you'll be back tomorrow for the other one. Or, you could take less pain now and avoid the worst future version.

The federal budget is higher than tax revenue. It has been this way for decades with few exceptions. If taxes dont cover the budget then the budget should be cut to fit revenue. But, that isnt what has been happening. The budget grows every year and the govenment borrows more money to cover it instead of cutting the budget or raising taxes.

We are running the government on maxed out credit. But dont worry, congress will just increase the credit limit so we can borrrow more.

The real solutions are political suicide. So, we will get the most shitty option of borrowing and printing more money.

Please explain your thesis, how does CPI inflation help blue collar / service workers recover?

On the contrary: a large number of the "poor" have ~zero or negative net worth, so inflation (unless extreme) doesn't affect them negatively.

> so inflation (unless extreme) doesn't affect them negatively.

Don't see how rising prices doesn't affect them. My MIL is on fixed income and she says she is spending a lot more now on necessities than last year.

Unless wages were adjusted for inflation( which they aren't) they will bear the brunt of inflation. Most ppl here dont' even notice grocery bills going up.

This is a BS talking point.

Inflation screws people who's money comes from wages and who's wages are inflated slower than inflation increases costs (which is always how it goes down) and living paycheck to paycheck turns into having to choose what bills to pay. Your ability to buy assets (which increase with inflation) is also depreciated so there's little hope of weathering it unscathed.

The people helped by inflation are the people with marketable skills and the opportunity to job hop who also happen to be using debt to live right up to the limit of their means and who can afford to buy assets (stocks, a home, etc). Statistically these people are highly over-represented on HN vs the population as a whole.

Inflation affects the poor much more than it does the rich. Rich people just spend more on their necessities, their living standard doesn't change, since they have assets to dip into.

OTOH poor people have to make tough choices with limited income, and meager savings. Sometimes this means paying rent instead of buying food. Fix the car to get to work, instead of buying school clothes for their children.

You should really examine your framing of the situation.

It does hurt the poor. The poor pay more for goods and services, and they don't have much cushion to begin with. Inflation definitely helps those in debt, as you're now paying down your mortgage or car loan with dollars that are worth less. People with lots of debt are not necessarily 'poor'. They use debt as leverage. Either directly or indirectly.

This is not correct. Employers of the poor are not increasing wages of their employees to track inflation, so from their experience everything just gets more expensive.

Indeed. Inflation hits those who live on wages the hardest, since wage increases lag inflation. Asset wealth does not have such a lag.

I hate these oversimplifications of monetary policy.

Yes, inflation can be terrible, contributing measurably to quality of life decreases. But the alternative could potentially setoff another decade of sluggish growth, or worse yet, trigger a full fledged recession. Further, much of current inflation is being driven by goods that are highly sensitive to pandemic shortages and we expect this to be transitory.

Like most things, there's no clear path. Anyone who tells you different wants you to vote a certain way.

> Like most things, there's no clear path. Anyone who tells you different wants you to vote a certain way.

Then why does the govt say that there is a clear path of huge spending, low interest rates ect.

They don't. If you paid any attention to the Fed whatsoever, then you can see they're watching the situation very closely and signalling to markets that they'll take action when needed.

Monetary policy isn't some secret. It's pretty easy to follow.

> they'll take action when needed

> It's pretty easy to follow.

> Monetary policy isn't some secret.

What is the decision tree for 'take action'? Why do we need to use "when needed" if its so clear and straightforward .

> > they'll take action when needed

> > It's pretty easy to follow.

> > Monetary policy isn't some secret.

> What is the decision tree for 'take action'? Why do we need to use "when needed" if its so clear and straightforward .

Because I'm summarizing. Go pick up a Financial Times.

How can we vote a certain way on fed policy? Voting has no impact on the fed. I thought the consensus was we need to allow companies to fail. The fed has absolutely manipulated what it means to have risk (making all investment zero risk) which has clearly created more inequality. There is also clearly a correlation between QE and asset prices exploding, or do you believe these current valuations are perfectly rational?

> or worse yet, trigger a full fledged recession

Why does a recession need to have a negative connotation? It's what a healthy economy does to get rid of market inefficiencies.

Since the 2008 housing bubble popped, I noticed a general sense in the zeitgeist that recessions should be avoided at all costs. Is this not delaying the inevitable, or setting up an even bigger downturn in the future than what might have occurred more naturally?

> Why does a recession need to have a negative connotation? It's what a healthy economy does to get rid of market inefficiencies.

Because market inefficiencies get restless when they can’t pay the rent or feed their families. They might even pick-up pitchforks…

Wouldn't a better use of resources be to retrain people for new careers?

Propping up failed businesses and obsolete jobs because "the economy" makes no sense to me.

Yes, but the issue with this is offering free education to people so they can upskill and pay more in taxes is considered socialism, which means that any program would immediately be killed by the right.

A fed-engineered recession is certainly not ideal.

But more broadly, I was talking about the tradeoffs of fighting inflation insofar as ordinary people are concerned.

I admit that I don't know what is causing sluggish growth, but I see all the countries that are growing out of the poor group have much higher growth that we have had in decades. Isn't it reasonable to assume that we have simply (in most segments, clearly not consumer technology) hit the top of the S curve and that this has nothing much to do with government policy?

Yes, some economists started to worry about this along with our ability to hit 2% inflation targets. The concern is even greater in Europe and Japan. And currently, the hot US market is provoking conversations about this very thing.

Some of this should be taught in public schools then - unfortunately we are spending more time teaching "woke" concepts in math these days. Maybe we should return Home Economics without the "women in the kitchen" aspect.

What are these concepts?

I would also like to know what "woke concepts" the parent commenter thinks are being taught in mathematics classes. After googling it quickly I found a lot of hysteria about it from right wing media outlets, but the actual documentation seems only to propose less rote learning and more application.

Reply on news.ycombinator.com