US Federal Reserve raises interest rates for first time since 2018

https://fred.stlouisfed.org/graph/?g=8fX https://en.wikipedia.org/wiki/Government_spending_in_the_Uni....

Has this been put into practice in large countries before?

It seems that the logical thing to do would be to put money into the economy through directly giving it to citizens, and then take money out of the economy through interest rates, by making it more expensive to borrow and reducing business investment. Typically you want to put money into the economy in a hurry, in response to a crisis, but you want to take it out gradually, so that businesses can plan ahead. MMT's framing of this still seems backwards, even if they've realized that fiscal and monetary policy are two sides of the same coin. You'd also get a lot less political resistance to the fiscal policy side if it involved giving people money rather taking money away from them.

Additionally, MMT states that it needs to use taxes to manage inflation, which the US federal gov't is clearly not doing, which undermines the testability of the theory.

I know "full employment" is a loaded term here, but at least in a general sense all who want a job could at least find something right?

One thing I'd be interested in seeing a discussion on as it relates to this topic is what happens when there is a legitimate labor shortage.

The remaining part of the MMT puzzle as I see it is: raise corporate taxes, and see if it helps bring inflation under control. If raising rates slowly doesn't quite do it, this should be the next go to for policy makers.

From that POV, destroying money (or, if you prefer, reducing the rate of increase in the money supply) is exactly what taxation does.

I’ve got my popcorn already.

Congress: 535 ants on a leaf, floating down a river towards a waterfall, with each ant thinking they’re steering.

I share your lack of confidence.

MMT is an understanding of factual nature of the environment in which government operates. Reduced to one sentence it is “the entire concept of fiscal balance is play-acting as if the government was using commodity or externally-controlled fiat currency, rather than it's own fiat and a distraction from the real constraints on government finance, rather than something which reflects, or even loosely guides policy makers towards, the real constraints.”

You missed the "mail everyone a cheque" era?

It is good _nominally_. Real wages are basically flat. Meanwhile, for everyone who didn't get a raise or can't currently find a new job for whatever reason, they're losing purchasing power. On top of that, the housing market has been completely destroyed by the Fed printing money and shoving it into mortgage backed securities. In many nicer areas of Southern California you used to be able to get a starter home for $600k (manageable for someone in a working class profession like a nurse or mechanic), now nothing on the market is less than $1.2M.

Also you forget that a big reason the labor market is so tight is because a couple million Boomers retired early during the pandemic.

I mean, did it? What evidence do you have for this claim?

Vaccines absolutely helped. But now everyone's wages are going down -- it was basically ~$3k stimulus checks that were actually loans with a 400% interest rate.

Real workers wages are falling. Inflation fundamentally increases inequality, i.e. people who own assets watch the value of those assets increase while people who work for income watch their income fall.

Well, let’s see:

1. I got maybe $3k from the government due to all that printing.

2. The price level is easily up 25% for things I need to buy, like food, fuel, computing equipment, and vehicles.

3. And I still got Covid, as did literally everyone else I know. My brother still can’t taste anything and a guy I work with died.

If that’s what you guys with economics degrees call a win, I will update my priors from “you guys are idiots” to “you guys are a cult that uses math to further the work of Satan.”

Yeah, Helped transfer wealth to the wealthy!

Does printing always actually equate to devaluation?

Risky investments aren't necessarily bad investments. Low interest rates give businesses more runway to operate investments that might take a while to show returns. A million dollar loan at 10% for an investment means that it needs to return into ~$80k a month to break even. At 2%, that same investment only needs a ~$16k monthly return. That's a huge difference in runway needed to start generating cash flow.

There are diminishing marginal returns to this, and when rates were already close to zero it is hard to imagine going to zero spurred much more than meme stocks and YOLO gambles.

the leverage for nonexistent (or overclaimed) mortgages were

leading to a crisis of confidence where credit dried up because banks didnt trust each other

got to watch for that. know the contents of your securities

In other words, even through the overnight rate is 0%, you could still push down the interest rate down for bonds of a longer maturity, and that'll further stimulate the economy.

If interest rates go down, it's easy to roll over old promises and make new ones besides. If interest rates go up, promises must be kept or the business will fold.

At the end of every business cycle, interest rates are low and there are lots of unprofitable "zombie companies" that operate by simply rolling over their promises. In order for the economy to grow, interest rates must be hiked to do a controlled burn and remove this underbrush. Zombie companies have to actually die. This is painful at the best of times.

Political will formation will be doubly hard this time around because A. there is more national debt (so we probably need to soft-default on it and inflate it down, first) and B. last time around Carter did the burn and Reagan got the growth and the credit, so the question is who wants to be Carter this time around.

The general model is that interest rates, lowering taxes, and increasing government spending are tools for shoring up the economy during a recession. During a growth period, interest rates should be raised, government spending lowered, and taxes raised, so we have room to adjust them for the next recession. This can, in theory, smooth out the boom-bust cycle which otherwise naturally results.

The problem is that we rarely raise interest rates, reduce spending, or raise taxes, since it's politically unpopular. Many of these tools are harmful; for example, outside a few domains like infrastructure and medicine, long-term high government spending tends to /harm/ the economy.

Pushing asset prices higher and higher beyond what a neutral interest rate would support just sets up bigger declines in the future.

At least a lot of the froth in the higher multiple stocks has been cooled off at this point.

The FED absolutely sets the interest rates by controlling the federal reserve rate which is the interaste rate paid to banks every day for their deposits with the FED

It's not clear cut as to what degree interest rates are exogenous inputs that central banks respond to, but the Fed absolutely does set interest rates, allowing some variability between upper and lower bounds.

Today, Fed adjusted interest on reserve balances (IORB, formerly IOER/IORR) to 40bps from 15bps. This rate determines how much interest banks are paid for reserves kept at the Fed. In theory, this rate acts as a floor for the effective fed funds rate. In practice, it's somewhat murkier.

The Fed also sets the discount rate (now 50bps), which is meant to act as a ceiling on rates. Banks are able to borrow money from the Fed's discount window if they need it; however, there's a stigma associated with utilizing this facility. The Fed now maintains standing repo and reverse repo facilities to help banks manage liquidity.

These policies all target the front end of the yield curve, which is where Fed has the most control. To manipulate the long end of the curve, Fed implemented QE. Other central banks (e.g. BoJ) have gone further, using yield curve control to explicitly impact the term structure.

> Instead they purchase and sell treasuries to member banks, such that those banks' balance sheets change in such a way as to make money more or less expensive to trade amongst themselves, which has knock-on effects for consumers.

Repo rates are determined by the market, but are bounded by the rates at Fed's repo facilities. A catch here is that not all market participants have direct access to these. While repo rates may impact behavior, the Fed's intended mechanism is IORB, which (ignoring steepness of the yield curve) influences how attractive banks find loaning money to clients.

> the mechanism that causes banks to have to borrow from each other (to meet the nightly reserve requirement, historically)

This market used to be the Fed Funds market, which consisted of uncollateralized loans between banks. The fed funds market is basically dead, replaced by the repo market, which is collateralized. IIRC, the remaining participants are GSEs like Fannie Mae and Freddie Mac, which can't collect IORB. They sweep their cash to banks and split the interest (which is why IORB can act as a ceiling instead of a floor).

https://www.federalreserve.gov/faqs/why-is-the-federal-reser...

So the data is partially based on market data (ie. implied inflation rate based on what the yield on TIPS is compared to treasuries). There's another data series for 10 year inflation that only uses market data and it tells a similar story: https://fred.stlouisfed.org/series/T10YIE. Since this is all market data, made by people who have skin in the game (ie. if they get it wrong they lose money), it should be less gamed the previous metric.

>Using the same formula as was used in the 70s would produce double digit numbers.

Can you elaborate on this? When and what was the methodology changed?

The federal government is $30t in debt. Even a small rise in interest rates would quickly make the entire federal budget servicing the debt.

There were a lot of structural problems as well, but rising rates leading to foreclosures set off the chain of events.

I will agree that last time, the recovery was speedier than anticipated, which only shows that irresponsible economic policy to avoid "economy will crash!!!" is overblown.

No, if interest rates go up, buyers can afford less, housing prices go down.

e.g. a 100 PE stock that implies a 1% return/year logically should fall significantly in a 5%+ inflationary environment. Once bond yields adapt to this environment.

It could also reduce demand by making it more expensive to buy things. Sure, that will probably have a side-effect of increasing unemployment, but that unemployment isn't the goal. The goal is to make it cost more to do things so less people want to do them.

I disagree pretty heavily here. Yellen was always honest about the need for monetary policy which would be politically unsavory (which is why her term wasn't renewed). Her delivery was very much designed not to "spook the markets" but I think part of the reason she scared the markets was that she favored long-term stability.

Her words as Treasury Secretary aren't exactly sugar coating things. She's been saying that the impact of the Russian sanctions are going to hurt American as well, and that inflation is probably here to stay in the medium term at least (she's long held the belief that high inflation is an acceptable tradeoff for low unemployment). Granted, those statements are followed up with "we are working on a solution"-type statements, but I don't see many promises.

Nobody wants the medicine, even if they need it.

Can you elaborate? I don't understand.

The exotic mortgage products (e.g. reverse ARMs) have essentially disappeared, people's homes are well capitalized, lending standards are much higher than they were, there's very low levels of home equity debt, overall debt payments as a percent of household income are at very low levels.

The people waiting for a housing crash are going to wait a long time. This one chart sums it up well:

https://fred.stlouisfed.org/series/MDSP

Mortgage debt service payments as a percent of disposable income are near all-time lows and at roughly 1/2 the number of the GFC peak. Since the vast majority of home loans are fixed -- what's the mechanism for rate hikes to cause a housing crash?

If fed accelerates rate increases, we are very likely to see a recession. Which will automatically reduce demand for goods and services and thus inflation.

But reducing inflation by causing mass unemployment will lead to other problems.

Either of these effects on their own would hurt the younger generations, and together would make the already slow wealth building hit a brick wall. (I'm 25, for the record, and I don't expect to be debt-free or a homeowner until well into middle age)

While it really shouldn't be true, and at the level of financial mechanics probably isn't, the stock market has become the measure of the economy. Remember, pensions are dead and buried, and the nuclear family standard means that relying on your children (read: you and I) is not the bulwark it once was. That means 401(k) performance is really, really important, as terrible as that may be -- its just the reality right now.

This literally could mean the difference between living independently or not for a lot of people.

Not to mention everybody working today with a 401k as their retirement plan will lose value no matter their age, which means they have to work longer than planned. This is a real life impact to a lot of people.

Sure they may not be producing anything, but is there any value to the idea they consumers still? A lot of FIRE philosophy is you work hard so you can earn retirement early too -- people aren't going to work all their lives either, there has to be a light at the end of the tunnel. It is saddening that it may not be the case for many.

For a lot of people, what is even the point of living if there's no retirement to enjoy?

They are an extractive class insofar as their present contributions are net negative. But you are forgetting they likely spent their entire life building up that account, both in terms of an actual retirement and the broader accounting of total life's contributions. Indeed, it is something that hopefully you and I will enjoy one day, because we've earned it.

That idea reeks of short-term thinking, and a world of endless work for no reward as your worth goes to 0 once you stop contributing.

Let's not forget that consumption is bringing in revenue to _someone_ which does provide value to the economy. Unbelievable

[1] other working people once they too retire.

Not true. If retirees have money, that's money they got paid for doing actual contribution. If you devalue that money that's devaluing their life's work and contributions.

Not an advocate for crypto etc, but it feels wrong that a bunch of folks like Powell etc get to decide the fate of whole generation's peaceful retirement.

>"It really seems like a powder keg for revolution."

I would argue your entire post seems like a powder keg for some self-reflection.

You’re living in housing built by someone in the past, driving a car engineered years ago, on bridges and roads built decades ago. You enjoy technologies that people even 30 years ago could only dream of, things you did not create or contribute to.

And then you have the gall to whine about those builders, savers, investors, and innovators who created those things.

Kind of sounds like you’re the extractive cost center, to be honest.

However, it would be prudent to assume that the social security benefits will have less and less purchasing power (since each USD will have less and less purchasing power), and the government will not increase the amount of the benefits sufficiently to offset the decrease in purchasing power.

As you get older 80% bonds 20% stocks.

Source: The intelligent investor (famous finance book)

People these days have 80% house, 15% crypto and 5% stocks

1 - holding bonds versus bond funds are very different, as in the first case, you control the timing of the sale, and in the second, the fund does. That has all sorts of implications about losses (as well as capital gains) in any particular year.

2 - Interest rates have been at zero (ignoring this week's interest rate hike). Using the Barclay's Agg duration of 6.7 (as of this week), then you are just asking for pain in your bond holdings. Stocks may or may not go up or down, but bonds are either going to go down or generate basically zero cash flow. Many people have embraced TINA as a result. [0]

[0] - https://www.ellevest.com/magazine/investing/tina-alternative....

I do see a separate parallel problem of too much dumb capital chasing returns that are in the past not the future, but that can also be connected to the maturation of internet/web platform and the rollout of 2010s web tech to legacy industries; applying web tech to healthcare and like Africa is low-risk high reward ... capital floods the low grounds first

also see "diffusion of technological revolution" installation/deployment model https://i.imgur.com/BLVTqo2.png

Anecdotally, my dad complains about paying an interest rate in the teens for the house I grew up in. My parents paid $69K ($188K in 2022 dollars) for the house, which was about a year old. Zillow estimates the same house at $457K today. Obviously not all of the price increase is due to lower interest rates, but the house _was_ much cheaper, so even with a high interest rate, the mortgage was pretty affordable.

My parents bought their house in 1979, for $33k. ~10 years later, when rates had lowered significantly, it was worth $150k.

At that time, though, you needed about 20% down payment to qualify for a mortgage. So you weren't borrowing as much, and houses were smaller and cheaper. It was very difficult for many people to buy a house in those years.

Interest rates are being raised by .25% per year.

If they were higher, people would go bankrupt, not have money to drive, use less gas/oil, thus reducing demand, thus reducing price, thus reducing inflation.

Theoretically, the money needs to be paid back eventually. But as long as the Fed interest rate is below inflation, paying back can always be put off by covering the previous debt with new debt.

Yes. Oil/Gas prices are pretty determined by OPEC voting and production of their member countries in conjunction with other macroeconomic issues. OPEC adjusts their production to take into account macroeconomic factors. The Fed rate is one of those issues.

Supply chain issues are being exacerbated by "free money" from the fed...

Commenting about things they don't know about is...what human beings do.

First, this never happens, and certainly is not what's been happening for decades now in the US with the Fed printing money, so it's not a very relevant thought experiment.

Second, taking your scenario as given for the sake of argument, what was stopping the unemployed people from cultivating the uninhabited farmland before? Was it the absence of money, or the fact that they didn't own the farmland?

In other words, the real operative point in your thought experiment is not the government printing money, but the government giving tangible resources (uninhabited farmland) to a group of unemployed people, so that they will produce something of value from it. The money is really incidental: once they start producing more food than they can consume themselves, they will be able to acquire their own money by selling the excess. The initial printed money is really more like a one-time grant of working capital, so they can buy enough initial supplies to get the operation going. And money doesn't even have to be printed for that: the government could just allocate some tax revenue to it.

Third, in our actual system as it actually works, who does get newly printed money? Is it unemployed people who could be doing productive work but aren't? That was perhaps true for COVID relief checks--although those didn't really enable anyone to go back to work, they enabled people to stay out of work, not producing anything, for longer--but in any case those don't actually add up to a lot in terms of the total US money supply. The vast majority of the money the Fed prints goes to financial institutions, and the only thing whose "production" is increased by that printed money is loans. Those loans, since they are mostly mortgages, will certainly redirect productive capacity in the economy (so we build more McMansions and commercial office buildings that sit empty for years after being built, while our roads, bridges, drainage systems, electrical power grid, and other infrastructure deteriorate), but they don't increase productive capacity overall. In other words, they're just redistribution--and almost always (with the COVID relief checks being the only possible exception I can see) from the poor to the rich, since that's who the newly printed money goes to (financial institutions).

> You can clearly see that the limitation on printing money is unutilized resources in the economy.

No, we can clearly see that the limitation on printing money is how much redistribution from the poor to the rich the rich think they can get away with. Remember that the Fed was initially advocated to the US government by rich bankers who were tired of the government coming to them for bailouts whenever there was a financial panic due to stupid government interventions (the Panic of 1907 was the specific one that prompted the legislation that became the Federal Reserve Act), so they decided to put a system in place that would make it so the costs of the bailouts ended up being paid by ordinary citizens (who wouldn't get any of the money the Fed would print) instead of them.

> Thought experiment: If the government printed money to send unemployed people to uninhabited farmland to start cultivating it (in complete isolation from the rest of the economy) would it cause inflation for the rest of us who aren't connected?

Sure, because those people can't actually spend the money they were given. But who would agree to be sent to said island? The incentive of getting paid is worthless if you can't spend your money on anything. If the government printed money to pay people to build wind farms with the restriction that they can't spend this money on anything, how many workers would accept this offer?

This is literally what's been happening to the economy for the last decade. All the money that went into the economy from 2008 onwards ended up in the financial & tech sectors in NYC, Seattle & the Bay Area. As long as it stayed there, it only increased prices in NYC, Seattle & the Bay Area. Then remote work happened and these techie millionaires realized they could live anywhere. Or they just hit a threshold where they can retire. Suddenly those millions are ending up in places like Boise, Phoenix, Austin, Denver, Asheville, etc. and now we get inflation.

If USD was not linked to gold, why was a multi-country agreement needed to change the value of the US dollar to gold?

* https://en.wikipedia.org/wiki/Smithsonian_Agreement

> To call the monetary regime in place in the 1920s "the gold standard" is a serious misnomer. The Federal Reserve was created and authorized to print money (Federal Reserve Notes, not backed by gold or anything else) in 1913.

The Federal Reserve was limited to how much money it could "print" by the 1920s, which is why the article explicitly used that time period to make its point:

> It's not clear cut when exactly the U.S. was on or off the gold standard. We suspended it in July 1914 when the onset of World War I precipitated a domestic financial crisis. We then re-established the full gold standard in December 1914 after an aggressive policy response stabilized the financial system. This continued until we entered the war, and subsequently partially embargoed gold exports starting in September 1917. The gold standard was still in effect domestically -- meaning people could trade dollars for specie -- but not internationally. These restrictions on gold exports continued until June 1919, at which point we returned to the full gold standard. I have started from this last date, because there is no question that we were operating under the gold standard at this point. For more, read this superb Federal Reserve paper on the history of the gold standard from World War I through the Great Depression.

* https://www.theatlantic.com/business/archive/2012/08/why-the...

* https://archive.ph/FWKcL

This limitation was one of the contributing factors of turning a market crash and economic downturn into deflation and the Great Depression. See James and Bernanke (1991):

> However, Temin (1989) argues that, once these destabilizing policy measures had been taken, little could be done to avert deflation and depression, given the commitment of central banks to maintenance of the gold standard. Once the deflationary process had begun, central banks engaged in competitive deflation and a scramble for gold, hoping by raising cover ratios to protect their currencies against speculative attack. Attempts by any individual central bank to reflate were met by immediate gold outflows, which forced the central bank to raise its discount rate and deflate once again. According to Temin, even the United States, with its large gold reserves, faced this con- straint. Thus Temin disagrees with the suggestion of Friedman and Schwartz (1963) that the Federal Reserve's failure to protect the U.S. money supply was due to misunderstanding of the problem or a lack of leadership; instead, he claims, given the commitment to the gold standard (and, presumably, the absence of effective central bank cooperation), the Fed had little choice but to let the banks fail and the money supply fall.

* http://www.nber.org/chapters/c11482

The economies of most countries started to recover once they left the gold standard as they could pump money into their systems to generate economic activity.

If there's not enough money in one's economy you can't do business. There are historical periods where economies literally ran out of money:

* https://en.wikipedia.org/wiki/Great_Bullion_Famine