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Comment by credit_guy | Hacker News Reader

> If they hike the rates too much then debt servicing would be costly.

The Fed doesn't care about the cost of servicing the debt. That's the US Treasury's job. By law, the Fed has the dual mandate to keep both inflation and unemployment low. That's it. Nothing to do with the cost of servicing the Government debt.

If the interest on the Government debt becomes too high, nobody will point the finger at the Fed. If however inflation is high (like now) or unemployment high, you can start hearing people accusing the Fed of gross negligence. In the extreme, the Chairman of the Fed may be sacked, then brought in front of various Congressional investigations, and may even find himself in contempt, or some other very unpleasant situation.

Bottom line: the Fed really cares about inflation, and doesn't give a damn about debt servicing.

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I don't buy this argument. There are good arguments to the contrary which Jerome can bring up and has at previous hearings.

Say demand quiets but the price of inelastic goods (gas and food) continues to skyrocket due to greater demand from developing nations who demand more resources to have a better standard of living. How will hiking to 10% fix anything?

Sure you'll kill demand, but you'll also kill financing supply which will only exacerbates the issue over the long run. We need more drilling, more refining, more farming now that Russia is out of the picture and the Saudis are playing games.

Hiking too far is actually a horrible policy choice, and Powell can make a cogent argument about it: he already has mentioned this in hearings. You can't address supply related constraints with higher rates. At some point, they might justify capping rates to finance the needed supply, and that argument smells like the yield curve control of the 1940s. I suspect this argument will become more palatable if we have high unemployment and high inflation. [0]

I have a feeling whatever policy rate they pick will aim to be slightly sub neutral (negative real rates) as they pray inflation resolves itself, while constantly pointing out they have no control over whether Brazil has a successful wheat harvest.

[0]: https://libertystreeteconomics.newyorkfed.org/2020/04/how-th...

I actually agree that hiking too high is a very poor policy choice for a number of reasons but for your example of fuel, if you kill the demand for it, the price will not skyrocket. On the other hand, however this would also mean that the economy as a whole is dead so again not the best policy choice (but it is likely to rein in inflation)

You are not actually responding to my argument. I was arguing that the Fed does not care about the cost of servicing the Government debt. I wasn't arguing about how much the Fed will hike. They will stop hiking when they consider fit, but the interest on the Government debt will not be one of the factors they'll include in their decision.

They definitely care about second-order effects. If for example they raise the rates enough that debt servicing starts to become a real issue and this leads to higher taxes and spending cuts, then that is an extra economic headwind which they must consider.

They don’t care about the debt figure per se but they do care about the economic implications of that debt, and how other entities are likely to react to it.

> If for example they raise the rates enough that debt servicing starts to become a real issue

then they would've realized they hiked too much. That's why the current Fed hikes are conservative - a lot of people are claiming that they are late, and should've done it earlier, but i think they are doing it right. Slow and steady, and be conservative.

One of the reasons the Fed keeps factors like servicing the government's debt at "arm's length" is because the debt figures are a political football.

The Fed wants to maintain a balanced, non-partisan position, as much as possible.

That's true in theory, but in practice I don't think it works that way. The executive and popular opinion can put pressure on the fed, and even absent that the fed does in fact care about the stability of the nation more broadly than that mandate suggests. I agree with the parent that the fed is very unlikely to raise rates to double digit levels given the high level of government debt. More likely we'll have an extended period of high-but-manageable inflation, and inflate away some of that debt (and some of everyone's savings).

That’s just not true. The Fed will take into consideration all of the consequences of their actions. They’re not going to do whatever they want and put the country in historical depression.

If the US government can't service its debt, wouldn't that cause problems for inflation and unemployment?

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