All bets are off if the Fed and White House are wrong about inflation
cnn.com
cnn.com
Most of these price increases (e.g. semiconductors, lumber, consumer perishables) are supply-chain related. It’s reasonable to expect them to subside as the most acute phase of the pandemic recedes. Only one I’m not sure about is the price of a meal at a restaurant …
“Oh hey Jim, I know we hired you at $25/hr.. well now that things are normalizing, well have to pay you the real rate of $12/hr”
Even the PepsiCo CEO was commenting on passing higher prices and the consumer accepting them just fine.
There used to be the real divide between both, but now every action by the fiscal side is effectively done by the monetary side. Congress writes some laws, the treasury calls up the FED the night before the day of selling new bonds and just like magic, the bonds get sold at a superb price.
The fed is very much aware of the inflation, but is on the awkward position that were they to raise the rates even a tiny bit, it would bankrupt the federal government. Going from 0-1% to 4-5% interest rates, would lead to default as just the interest on the money owed is at $hundreds-billions yearly. Now double or tripe that cost…
So what’s the FED to do?
Why are living expenses going up faster than real wages?
Why do you think theres a godly group of supremely moral and righteous humans sitting at the FED?
Sure but this is "boring". An economy that can only support a negative interest rate can obviously not support a 4-5% interest rate. I don't see any surprise or any malice or trickery. The economy wants negative interest rates, the interest rates are at 0% so people hold onto their deposits and prevent the repayment of the debt. An economy that doesn't want to give up its deposits will obviously die if you give it even more reasons to hold onto deposits.
There is no gotcha. No criminal to catch. Interest rates want to be low, raising them for no reason will destroy the market because it wants the interest rates to be low. If there was sufficient inflation i.e. the market demanded higher interest rates you could raise interest rates with no ill effect. Before that happens you'll have to let the current inflation be here for a year. If you kill it prematurely you'll actually have to do more unconventional monetary policy.
>Why do you think theres a godly group of supremely moral and righteous humans sitting at the FED?
Because you don't want something like turkey to happen where the democratically elected president messes with monetary policy and causes double digit inflation.
Imagine you had:
1/10 of all dollars.
Next year they printed 20% of money supply, so now you own:
1/12 of all dollars.
Your own wealth got siphoned off indirectly without you being cognizant of it. That’s exactly whats happening here. Every year they’ve been siphoning off 2-5% (maybe more) and now they have to ramp up further just to stay ahead of the game.
This isn’t by accident, it’s by design. So yes, there is a criminal here.
Most of the printed $100 USD bills are abroad in someone’s cabinet or mattress being used as a store of value vs their own trash currency. Most of these people still hold faith that the USD is a sound currency, and the FED takes that faith and abuses it by quietly eroding their savings.
Also, selling Treasuries isn’t “magic”. US Treasuries act as reserves in the banking system, that’s how modern banking works. You would be right to say that the Fed and the Treasury do indeed work together — after all, the US government is unlikely to default on any US-denominated obligation issued by itself — but the level of coordination you’re implying is a fiction.
The fed has a dual mandate to provide full employment and economic stability. If the Fed’s policy caused mass bankruptcies.. then the Fed would be failing part of its mandate.
IMO the scary part of this for the fed is housing. Housing is appreciating to substantial multiples of incomes due to low interest rates and restricted supply. If the FED raised rates and crushed the housing market the majority of Americans will feel the pain.
400 basis basis points, back to the level of late 2005-early 2007, is a “tiny” increase in rates? That's an enormous increase...
> just the interest on the money owed is at $hundreds-billions yearly. Now double or tripe that cost…
If you look at history of Treasury interest rates and Fed Funds rates, the relationship you imply where even that giant increase to the Fed Funds target would do that... doesn't exist.
https://www.dallasfed.org/research/economics/2021/0513
Long story short, we are comparing year-on-year when last year was itself almost as unusual as can be.
The other stuff about the fed activities not influencing treasury rates is about as true as inflation being 2% avg for the last couple years.
No, it's not; its from the global minimum to, while not the historic global maximum, a level clear on the other side of average.
> The other stuff about the fed activities not influencing treasury rates
No one said that. The relation historically is not such that going to a 4-5% fed funds target would double or triple debt service costs.
This should not be happening. Something is Broken.
The car salesman won’t see the higher prices? The guy down the street won’t see the higher prices and ask for higher wages to afford the price increases?
Combination of supply limitation and a large number of start-ups/VC money in the sector.
It really is true today that buying a trusted used car is WAY easier than buying a new car.
This has squeezed a LOT of the previous depreciation math out of the market (read: there was a huge arbitration opportunity)
Could you elaborate on this? Is this a recent development?
I bought a new car in November 2020 and while I certainly don’t _love_ the dealership experience and I’m probably less uncomfortable with financial negations than your average person, it didn’t strike me as a particularly painful experience.
When they say transitory inflation they obviously mean transitory inflation above 2%. One problem with transitory is that a lot of people think the timescale is very short, maybe it will be over by the end of 2021 but nobody really knows because it all depends on how quickly the supply chains catch up.
Also we all experience inflation differently and our past experiences influence our expectations. The things I look at are already highly inflated (electronics, cars, housing, restaurants). Those are not everything. But I bet readers of this Website most often look at those same things …