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Comment by baron816 | Hacker News Reader

This isn’t exactly great news, but it’s probably not as bad as you think. It means that inflation is a tractable problem. The Fed as a lot of tools at its disposal (first of which is to take its foot off the gas). If we were in a situation where workers were demanding higher wages because they were expecting prices to go up, and businesses were raising prices to pay workers who were demanding higher wages, then we’d be in a much tougher spot. Wages not keeping up with prices means that’s not happening yet. By the end of next year, the narrative will shift away from rising inflation as the Fed tightens up, which will in turn cause inflation to fall.

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This is wrong IMO - the fed has NO tools in its hands. Its last tool was inflation rates, and it burned that during the great recession. It is now caught in a pickle: raise interest rates, causing a mass exodus of wealth from securities to savings accounts and CDs and causing the stock market to tumble (like it arguably always should have done since 2008), or let inflation take its course.

I am not an economist, and I'd love to be proven wrong. I just don't see how this ends in a good way for the economy.

That the fed has no tools is correct to the best of my understanding. The central banks are tasked with solving problems they have no mandate to solve.

Inflation is, among other things, a problem of the market having too low a demand for money compared to the supply. One obvious way to fix that is by taxing money out of existence faster, decreasing the supply and thus increasing its value assuming demand stays fixed. (And there's reason to think it will; demand for money is a relatively unflexible parameter.)

But of course, central banks do not control taxation, so there's not much they can do.

Inflation isn't bad, it is part of the interest rate cycle. You cut rates until you can't then you use inflation.

Could you elaborate? Why is the interest rate cycle good?

It's not good or bad, it just is. We're at the bottom right now, we'll stay here for a bit then experience inflation. Allocate assets accordingly. There isn't a good way up from zero interest rates besides printing money.

> I am not an economist

Yeah, if you’re interested in this stuff, you should do some research. The Fed’s options aren’t 0% rates vs 15% rates. It’s going to raise rates .25% at a time. .25% is not much of a difference. It’ll move slowly and act cautiously.

The Fed, and other central banks have dealt with inflation many times before. And very effectively at that. Stocks could fall, but the stock market is not the economy, and the Fed has no mandate to prop up stocks.

> and the Fed has no mandate to prop up stocks.

Not true in the least anymore - retirement savings for a large percentage of our population are tied up in stocks thanks to the death of the pension. Asset and securities prices as a whole are a large concern for the fed when changing policy, as a result.

The Fed has a dual mandate: price stability and maximal sustainable employment. Nothing about supporting the value of investments.

https://www.chicagofed.org/research/dual-mandate/dual-mandat...

FED actually has three mandates, one of them almost never mentioned:

* employment

* price level

* moderate long term interest rates

The requirement to pursue moderate long-term interest rates is usually seen as part of price stability, since the level of long-term interest rates is determined by inflation expectations.

Cf. https://www.federalreserve.gov/faqs/what-economic-goals-does...

You ask others to do some research, which implies that you have good sources on how "The Fed, and other central banks have dealt with inflation many times before. And very effectively at that"

I'd be interested to see them, especially any from the last 40 years (i.e. post-Volker).

For pre-Volker, I'm interested in your sources from the early-mid 70s, and the way inflation was "controlled" in the years immediately surrounding the release of the gold standard.

> I am not an economist

People who don't know shit about economics sure love to bust out their ignorant opinions.

'The Fed as a lot of tools at its disposal...'

Average and poor Americans would be better off with a simple formula to set money expansion. Then fire the private 'Federal Reserve' banksters and let someone else have the contract to clear checks.

It is long past time to end the 3rd central bank.

Except for their role as referee. Forcing banks to implement their real time payments system FedNow seems like a good thing, but I’m just learning about it.

How well did they do as referee in 2008? Did they take prompt corrective action when it was obvious banks and rating agencies were mispricing their balance sheet items, or mostly wait for explosion and then bail out their buddies?

The FED has tools to affect monetary base (physical currency + bank reserves). But inflation is mostly a function of money supply (physical currency + deposits), not monetary base. All tools at FED's disposal are very indirect, leading to frequent "pushing on a string" situations

That narrative makes sense, except for one thing: why wouldn't the Fed have taken their foot off the gas once inflation hit, say, 4%? Why wait until we're at 6.8%?

The other mandate of the Fed is getting full employment. Pumping money into the economy helps increase employment and there is a long way to go to get back to pre-pandemic levels on that metric.

They believed the inflation was transitory, and were going to wait it out. Now it's very clearly not transitory, so they are taking action

In the long run all is transitory. That being any action in a complex system can result in an unforeseen cascade of effects.

Ah, the Phillips curve. I recommend you make some charts for yourself comparing US unemployment figures with CPI inflation and see if you can spot the curve.

hint: https://www.hussmanfunds.com/wmc/wmc110404.htm

spoiler: " there is in fact no strong "tradeoff" between unemployment and general price inflation, and almost certainly not an exploitable one. The Phillips Curve is essentially a statement that lower unemployment is associated with higher inflation in real wages. The strategy of accepting higher inflation in hopes of achieving lower unemployment (which is the basis of Bernanke's policy efforts) not only drops the phrase "real wages" but reverses the direction of cause and effect. "

Also, it has clearly not been transitory for most of 2021. The "transitory" claim was backed partly by the pandemic, but relied on a 1-year lag. If, however, you used a 2-year lag (thus eliminating pandemic effects...

I was just explaining what the Fed's public reasoning has been. I am not knowledgeable enough to comment on the correctness of the theory.

Inflation has been well below goal levels in recent years. Their goal this year was to have it well above average to make up for the past and keep unemployment low.

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