Federal Reserve raises rates by 0.75%

>What we're allowing to happen here through investors buying up housing stock (and jacking up the prices), second homes, AirBnB and so on has reached the point of being a human rights violation IMHO.

There are plenty of affordable places to live. People just don't want to move there. Buying a house in a hip U.S. city/suburb isn't a human right.

The Norway example is really annoying. It keeps coming back as an example to follow, when everybody knows it is a complete outlier that cannot be reproduced elsewhere.

Norway is sitting on a gigantic pile of offshore gas that it uses to generate massive profits that go into a huge fund they don't know what to do with, all of that for a 5M population that drowns into social programs.

There is literally no country in the world that has this ratio of natural resources $ / capita.

Yet, when you look at what Norway has actually produced over the past few decades in terms of innovation, companies, etc. the picture is very, very empty.

>"This is turning into the West's version of Pakistan's brick kilns."

Could you elaborate on this reference? I am not familiar with this.

I think wages only can go up with abundant energy.

This time around interest is lagging inflation by atleast 1 year.

In the 70s the rate and salaries increased BEFORE the inflation occured = inflation was rate/salary driven and because debt level was lower.

Today salaries are not increasing 10% per year for most people.

So I actually think the interest rate hike increases the scarcity inflation eventually since energy production need low interest loans to build new sources.

The only sure thing about the hike is that ZERO new companies will be created, for good and for bad.

Thanks to serfdom, we have IPhones and Gadgets.

Which consumer products do you own come from Norway?

>Oil hasn't gotten more expensive to produce

a huge chunk of oil has been taken off the global market and refining capacity can't be increased instantly

>After going into massive debt for college

college used to possible to be paid for with a part time job before the government started handing out loans which jacked up prices

Alaska has been paying residents since 1976 https://en.wikipedia.org/wiki/Alaska_Permanent_Fund

> Rising wages? There has been no meaningful real increase in wages in 40 years despite a massive increase in productivity.

If you're telling me that the AVERAGE person in the West is worse off now than in 1925 or even 1965, you're delusional.

MAYBE the average white male. But even that I am highly skeptical...

Was life better in 1995 or 2005 or 2012? I dunno. There's ups and downs. The trend line has been obvious.

Money drives the political process. We refuse to change it. Stockholm syndrome.

Just getting corporations and billionaire individuals to pay some taxes would be a nice start.

> The returns that capital demands (and the government obliges to) are ultimately unsustainable.

That's the start of the top comment, really? We're emerging from the era of unprecedentedly low returns on capital. There are trillions in bonds with negative nominal yield ffs.

Last budget and tax cut was 2017.the real solution is to tax wxcess wealth and force wealth creators to pay for society

They're drinking the water while choking the river.

If you have to have ever-increasing profits, you have to ALSO have purchasers with ever-increasing purchasing power.

You can slide by for a while by wedging yourself into a currently existing system and tapping some of its resources, but eventually if that drain isn't backfilled with more then it will run dry.

Productivity has risen, but it isn't a tide tide that raises all boats. Look at what has boomed since the 70s, finance and tech. Finance because markets were liberalized and the economy financialized. They are at the junction where capital gets allocated in the economy, so they are able to take rents on all the capital that flows through them. The more money moving around the more they slurp up. Tech is where the lions share of productivity was created. All of the huge tech companies are able to leverage the internet to reach a market way larger than any physical store could before. A software development team is automating the workflow that would have gone to physical store employees running a Sears or whatever, a company manufactures a machine that does the work of 5 people 10 times faster, etc. That is why they get paid so much.

Meanwhile the rest of the economy de-industrialized, manufacturing jobs became more scarce because technology increased productivity, whatever was too labor cost intensive went overseas, and whatever jobs couldn't be offshored, retail and service jobs, aren't capable of having the same productivity gains as what was happening in tech. There are pretty hard limits to what restaurant staff, or retail employees, or other regular jobs can do to become more productive. That is why their wages are stagnant, the only reason those jobs exist is because they can't be exported, in some places they even import foreign workers to do those jobs to keep wages low. This is why unions fell out of favor, labor has no leverage anymore since their jobs can just be exported, or they cant but they are low skill jobs so employers can just churn people or grab import immigrants to do it because employees are nothing more than cogs in a machine that Amazon hasn't figured out how to automate yet.

Keep in mind that this is all by design, capital was liberalized, economies globalized, college loans guaranteed, nimbys limiting development in real estate and energy, these were all policies that people wanted and politicians enacted, whether or not they were fully aware of the second order consequences which are why things feel so messed up now.

Question for anyone that knows - have healthcare costs eaten away at what possible wage increases could have happened? It seems to me that for the average almost-minimum wage full time worker the insurance cost to their employer is probably a very large portion of their wages.

> personal preference is to trigger a recession and reduce inflation

These aren't binary outcomes. Tight money does nothing to ease supply-side bottlenecks. It does little to target demand displaced by rising energy prices. If those are the principal drivers of inflation, tightening could depress non-energy demand in a way that causes a recession without alleviating inflation. Stagflation. (To be clear, we're not at tight money yet.)

I just wish it was done earlier and more cheaply during otherwise good times.

A key driver to inflation is that wages for lower-income workers was finally starting to rise.

Tanking the economy will hurt these people the most. But yes, inflation would flatten.

I'm sure the lower middle class people who lose their job will appreciate it.

Inflation is largely being driven by import problems and oil prices, therefore, it is unclear if a recession is a golden key to lower inflation. Keep in mind that oil is internationally expensive, and even a reduction in the US may not bring down prices significantly.

So we could see recession AND inflation at the same time. Then tack on higher interest rates, and everything goes squish.

Here's another perspective to this. An induced recession at a time when most people and businesses are recovering from historic losses that came about in the pandemic, is the worst.

In a recession, spending from the top 10% of the population slows down, which in turn stops the trickle down economics, and hits the lower 90% of the society the hardest. And when that happens after a 2 year long period where they were already hit hard, the effects will be even more long lasting.

[Edit]: Since most of you latched on to the argument that "trickle down economics" doesn't work, I'll clarify. Outside the rhetoric of "Billionaires are hoarding all the money", in a healthy economy, trickle down economics is how most of the businesses work. Every time a person earning six figures goes out buys that extra pair of shoes or goes on that extra vacation or orders in food because they were feeling lazy, it's trickle down economics. It works. When the people with higher purchasing power (I said top 10% for a reason and not top 0.1%) feel the pinch, it has a disproportionate impact on people with less money to spare.

Every central bank in the world is caught between a rock and a hard place. A recession would be bad for the long-term economy, likely reducing aggregate productivity. But if they don't manage to get inflation under control, we'll see a wage/price spiral as high inflation expectations become entrenched among companies and workers.

takes guts to do this and it was needed. Problem is that it will expose that most of the US economy is a sham that needed 0% interest rates to even fake growth. our "leaders" have been kicking the can down the road for a long time. US economy used to grow even with very high interest rates, now even a slight increase puts us into a recession.

> pensioners

Are US pensions not tied to the CPI or some other inflation measure? (In Germany, pensions are, in principle, tied to the development of wages, which are generally assumed to outpace inflation.)

Wages have been riser faster than inflation and triggering a recession will reverse that.

People love to act like they’re helping poor people when in truth they’re just hurting the labor market ie everyone but rich people.

I don't think it's that simple. Lower middle class and poor people have debt, and inflation is good for making debt less valuable in real dollars. Pensioners, maybe, but social security is indexed to inflation if I'm not mistaken? I wouldn't be surprised if many public and private pensions are as well.

This is much more a move in favor of the rich that are owed money by the poor imo.

The Fed missed the chance to act quickly in November/December and now it has to show commitment to bring inflation down before it spirals out of control. In the US and the UK, the current burst in inflation is more endogenous than it is in the eurozone (see core inflation), so it can and should be put under control by the central bank and by the government, the former with interest rates and the latter cutting stimulus checks and the like.

We’ll see what the BoE and the UK government do, but I’m not an optimist. I don’t see Johnson stop using public money to directly buy votes and I’m very doubtful of the competence of a central banker that goes on TV asking people to not demand pay rises.

I agree.

Selfishly I want inflation to inflate away my debt. But I'm well compensated and able to pursue new opportunities even in pretty lean times. Practically we have to control inflation in order to avoid far worse problems.

At the end of the day, inflation on average hurts older people, and older people are more likely to vote.

Speaking of lower middle class and poor people. Powell recently stated that workers had too much power and were able to demand too much higher wages. He intended to create policy to tip the balance of power away from workers to resolve this. I don't believe the well-being of lower middle class and poor people are a concern of his.

https://www.wsj.com/articles/transcript-fed-chief-powells-po...

Actually higher inflation may help the poor and the middle class. If the inflation is caused by higher wages it is of great advantage of the poor and middle class. As well as a lot of the upper class (i.e., those of them that work for a living).

The present inflation is a bit of a mixed bag. It is partially caused by higher wages, but it is mostly caused by high oil prices, disturbances in grain and fertilizer sales caused by the war in ukraine and various covid related supply chain screwups.

I think the solution is to continue to address the things that can be addressed, like the covid supply chain screwups, low refining capacity, etc. Triggering a recession on purpose is really dumb.

I would say the inflation hurts middle class significantly more -- they at least have some savings/money.

However, if you are poor you would have more debt\less savings. As such a recession would be worse -- especially as it leads to less jobs and lost jobs.

> You can argue either side to this, and make a good case.

Here is an argument. Fed is a thief. First it recklessly bailed out all the toxic banks and derivatives in 2008, then kept the interest rates low for too long propping up the asset prices, then basically printed money as if there is no tomorrow, and then the moment middle class started to see wage growth they gave the asset owning class opportunity exit with big margin as they retired and then started raising the rates. End the Fed.

It actually may not be, when you enter a recession you can fall into an equity trap where everyone starts hoarding money and it further plummets the economy

I generally agree with all of this, though, i think two of the points may see counter-intuitive outcomes:

>* Housing bubble. Near zero central bank/bank interest rates has inflated a housing bubble. Higher interest rates will decrease housing prices since fewer buyers will be able to afford higher interest mortages.

Ehh... we should expect this, but supply may meet demand, instead of the other way around. We could see an unprecedented ramp down in the already unprecedentedly low inventory.

>* Less investment companies buying up farmland. It will be more expensive to finance these deals

I would be skeptical of this. There will be fewer financed deals, but there are likely firms out there betting on these rate hikes failing, which still make farmland a safe bet against inflation.

Thanks for the link

Hmmm, Moody's where do I remember that name from? Oh ya here it is - https://www.theguardian.com/business/2017/jan/14/moodys-864m...

Economics is the lies told by some middle class assholes with a degree and/or credential that get paid just enough by upper class assholes to trick low class rubes.

> Predictably, the Fed's quantitative easing combined with stimulus created inflation.

Combined with the removal of the conditions to which the stimulus and easing were responding, largely, the effects of both voluntary and mandatory behavior changes associated with the pandemic. (That's also why this didn't happen with last fiscal/monetary stimulus, because the underlying conditions didn't snap back as fast, allowing stimulus to unwind without overshooting.)

A much greater proportion of this inflation is due to supply side shocks, and very little (if any at all) has to do with QE. COVID simultaneously destroyed supply chains while shifting consumer from spending on services to spending on goods which, by the laws of supply and demand, meant prices for goods went up: inflation.

Energy and locomotion are core aspects of the US economy that factor into just about everything including – you guessed it – the price of goods! And just as the impacts of the pandemic were easing in the US, one of the world's largest oil producers started a war and then was subject to sanctions and embargos by the US and Europe. And so, surprise, the price at the pump has skyrocketed! Again, no connection to QE.

The stimulus, on the other hand, I would agree with you; those checks increased the purchasing power of individuals right as supply chain issues cut the supply of goods. I imagine the alternative world where the stimulus hadn't happened might have been more structurally worse, albeit with lower inflation.

How does IRS win here?

When inflation was surging in the late 1970s and early 1980s, CD rates exceeded 10%.

The piecemeal approach ensures they avoid massive shocks and over-correction. The cure should not be worse than the disease.

Too many dollars are chasing too few goods because of supply chain issues caused by these governments locking everyone down when they overreacted. You can't reduce inflation this way except by affecting tens of millions of innocent people who now have austerity measures imposed on them from on high courtesy of Janet Yellen and her posse.

They should have avoided the steep lockdowns and given cash directly to households instead of the giant infusion/bailout to failing states and companies that didn't even need the money.

I know simple metaphors for complex problems aren’t great, but I’ve always liked this one:

Think of an economics equilibrium as a guitar string. The harder you pluck it (shock) the longer if vibrates back and forth before reaching equilibrium. Plucking it softer but more often, keeps the string closer to equilibrium across the entire time horizon.

This also applies to things like minimum wage increases.

Sort of.

But the government also has a deficit. Which means it's exchanging low % notes for high % notes.

I read something like this actually isn't the panacea it seems like in the long term because inflation reduces real growth long term, or something like that.

Most of the debt is shorter term and must be continually rolled over. So when first moving from low expectations of inflation to high expectations, there is a temporary one-time gain, but after that the government will need to pay higher interest.

And of course when the expectations return to normal there is a period when the government must pay higher than needed rates.

Related (but different): I'm wondering how much inflation will shift tax payers into higher brackets and increase the overall income for the government from those taxes.

Is the debt rate fixed on federal debt? I can’t find much info on this.

Ie if the fed funds rate doubles what’s the impact on the interest rate payments the government makes.

It's true that we are incrementally getting out of debt commitments by debasing the currency

But as others have pointed out, bonds eventually come to term and then have to be rolled over into the higher prevailing interest rate. With such a high debt burden, that debt service can become a significant portion of all tax receipts, at which point all services are funded from deficit spending.

2021 tax receipts estimate is $3.86trillion [0]. Debt stands at roughly $30.5trillion. Ignoring compounding for simplicity's sake, 12.7% rates would mean 100% of taxes go just to pay for servicing current debt.

When you look into discretionary spending (stuff outside of medicare/medicaid/social security) it's way worse. Subtract that away from the $3.86trillion and you only have $3.86- (1.3+1.1) = $1.46trillion to spend on defense, all services, and debt service from tax receipts. 1.46/30.5 = 4.8%, meaning that no tax receipts cover defense or any discretionary spending (services) if rates hit 4.8% (actually lower because of compounding), and all services are from debt. The most recent White House budget [2] suggests 10-year treasury bills will hit 2.8% by 2028; your faith in that number comprises a major part of your faith in the long-term solvency of the US government.

[0]https://www.whitehouse.gov/wp-content/uploads/2020/02/budget...

[debt, medicare/medicaid, and social security numbers] https://www.usdebtclock.org/

[2] https://www.whitehouse.gov/wp-content/uploads/2021/05/budget...

Edited for sources formatting

This is the graph to watch: https://fred.stlouisfed.org/series/ACTLISCOUUS but it's delayed by months.

What's worse is that some of the inflation becomes masked because of shortages. So in a simple picture if the government gives money out to buy baby food, but there is no baby food, the price people are willing to pay for baby food would go up since they have money, but not recorded as inflation since they are not making purchases.

> right now U.S. oil companies are simply not improving supply to even pre pandemic levels

Supply will continue to decrease in the US, both for raw inputs and refined outputs. It has nothing to do with the pandemic or the war in Ukraine and everything to do with the world moving off of fossil fuels, making any kind of long-term investment foolish. We will continue to exploit our existing infrastructure and…that's it.

The main reason things are going offline earlier than expected is because of supply change issues related to parts (i.e. if things can't be repaired, they go offline earlier than scheduled).

Aren’t savings like historically high

I thought the worst time to get hit by a depression was right before you enter the job market for the first time and/or as you attempt to buy your first house. I guess every stage of life has unique challenges that come along with a depression.

You're very right, but I think the trick is that prices rise faster than wages, if they ever fully catch up. That lag between price and wage increase is a super immediate problem for anyone going paycheck-to-paycheck.

Inflation affects the poor more than the wealthy.

Food, energy, shelter all become less attainable for the poor. They will always be attainable for the rich.

In absolute terms the rich will "lose" more money, or not gain as much, but this isn't the concern.

The concern is the inevitable increase of absolute poverty that will happen, and that is because the poor will be worse affected.

Rich people aren't going to struggle to pay their gas bill, or struggle to buy food.

A good chunk of the debt (~9 trillion) is owned by the Fed itself. When the bank finances a mortgage for example, because it is a fractional reserve system the bank is lending only a small fraction of its own capital. The bank simply borrows from the fed either directly or indirectly by selling. The bank's profit is that the mortgage interest rate on the mortgage (and risk) is higher than that of the risk free borrow rate.

In Sweden we got 0.75% since a week back on the closest thing to a state bank (SBAB) since the Riksgalden was closed a few years back.

That could take a long time. Banks are only going to raise the rates when they want/need more deposits. Right now the excess reserves are near all time highs. So banks already have more liquidity than they know what to do with.

As soon as you use it to buy I bonds.

I have mixed feelings on tech stocks. I feel like the general competence has gone down, and that makes them vulnerable.

Google is a shitshow right now. I don't think they can do B2B. Chrome Extensions. GSuite Free. Google Workspace App security audits. I can list of dozens of other disruptions like that. No one trusts them. At the same time, cost structure is astronomical; employee count has grown exponentially, to match revenues, with little to show for it.

Amazon is a cesspool of knock-offs, scams, and rip-offs.

Facebook's reputation is in the toilet right now and internal incentives are completely misaligned.

Microsoft is, oddly enough, doing the best of the bunch. They recovered from their evil hay day in the nineties, their incompetent '00s, and seem to be doing okay.

I think the move to degooglify will spiral. I think an Aliexpress might take down Amazon within the next decade or two. And Facebook might be Myspaced.

> The fed is aggressively raising rates as the economy goes into recession

The fed raising rates is what is causing fears of a recession in the first place. Cooling off the economy is the entire point, that's how you control inflation.

The fed is trying NOT to cause an actual recession, but still cool the economy enough to reduce inflation.

Google and FB rely on ads. Less consumer demand, less spending on ads.

The rate was like 10% when they started raising in the 80s. The situation now is different, and the 'crisis' at hand is the current economy's addiction to rates of zero for so long. Entirely self-inflicted by the FED.

The Fed is very reluctantly raising rates, not aggressively. Fed interest rate is now 1.5%-1.75% with 8.6% inflation.

You don't have labor and supply-side shortages during a recession. We're pretty far from a recession.

The fed may overly cool things off and cause a recession, but it's not a double-negative situation of recession PLUS raising rates.

It seems as though the dip buying will continue but perhaps the fed wants a smoother road back to reality.

The strong rally after the last meeting didn't even last one day...

Stocks rallying is just an indication that the Fed under-raised compared to market expectations.

Yes. Everyone else can use context.

No, it should either be 0.75% or 75 basis points

This does not affect existing debt in any way only newly issued debt.

Given that a recession hasn't happened (yet?) and inflation is still high and not trending down (yet?), I wouldn't say it's an over-correction (yet?)

Why should I believe that algorithms written by some random software engineers will be better stewards? "Algorithmic Monetary Policy" includes things like premining and exponential decay of rewards and causes huge community rifts over things as simple as block size.

Algorithmic monetary policy, based on the Taylor rule, would have been many percentage points higher for many months already, this correction is too late.

Funds pulled to see what would happen, now reallocated back. Is when everyone is screaming something bad is going to happen, something happens and people realize it was OK they can go back into the room.

The interest rate was hike was baked into the price already. Now there's a re-shuffle where people with higher risk tolerances start buying up stocks that are on sale.

> This sort of FED that we have now that tries to control the overall economy is - to me - at least as hopeless as centralized 5-year plans under communism.

This is a CRAZY comparison. The Fed is barely doing anything, basically trying to keep things stable using two simple tools, and is doing so iteratively and carefully. It is the literal opposite of a Soviet communist 5 year plan that details everything to the n-th degree and damn the consequences.

Is the problem the difficulty of running complex systems or the complete resistance to the idea from politicians and voters that reality is massively complicated. People just want “common sense” solutions and politicians who speak plainly but maybe that’s not what we need.

What's your offered solution? Throw our hands up and just go back to bartering? The federal reserve doesn't micromanage the economy (throwing rocks into the lake, as you put it) they have a few levers at their disposal that I would describe more as environmental variables (like setting the "temperature" of the lake, or limiting the size of rocks people are allowed to throw).

They are also doing everything at a pretty high level where you don't need to be able to predict economic events with 100% accuracy. You can know that throwing a 50lb rock in the lake will likely cause a bigger wave to come up on shore (regardless of other rocks being thrown) without being able to fully characterize and predict the timing of it.

5-year plans from centralized sources seem to struggle to even survive for 5 years, whereas the current system in the US has been generally functioning well for over 100. I'm not convinced they're as similar as you think.

> with an almost infinite set of variables and we seem continuously surprised when things get out of hand

This was never a matter of an overcomplicated system. The results were obvious (and some believe intentional) from the start of QE. A choice was made to take an economic hit later, rather than sooner, by those in power.

In fairness, inflation seems largely driven by energy prices, which in turn are driven by the Russian invasion of Ukraine.

Not the top event I'd imagine a bank predicting well.

> now they're in a panic in the opposite direction

Powell spoke when he didn't have to. He didn't have to speculate on inflation being transitory. He didn't have to make precise forecasts. But he did. That's left egg on the Fed's face. But calling a 75 bp rate hike panic is hyperbole.

Textbook weak leadership.

It's not overreaction, it's late reaction.

Inflation hit the stock market a long time ago, inflation is now hitting consumers, the fed rate is now many percent low.

What actually needed to happen is QE needed to end a lot sooner, interest rates needed to be raised moderately months ago.

All of this should have been entirely predictable, but instead of "oh god this is ready to blow" when stock market valuations were way above prepandemic levels everyone was like "this is awesome, I bet it'll keep going!"

There's no free lunch, you can't pump that much money into an economy that isn't doing a lot and not have consequences.

My biggest concern is that the Fed is actually just not in the driver's seat at all right now. Raising rates is definitely the right thing to do and will at least help, but the inflationary pressures don't seem to be monetary at all. There's just no policy answers to the supply issues and if a stock market crash didn't slow down consumer demand, idk how rate cuts are going to do it. The best case is this curtails some of the wage-price spiral which is not entirely positive. Asset deflation has already happened without their help. May as well sink my savings into Luna and hope for a turnaround.

This. Even in today's announcement, they seemed behind again claiming "American companies are in a strong position to weather through" - but we are already seeing mass layoffs and hiring freezes.

1. You're assuming that MMT is the right answer, which is far from a foregone conclusion.

2. You're assuming that Powell agrees that MMT is the right answer, which is definitely false.

3. You seem to have the idea that Powell has some control over the income tax rate, which is totally false.

Isn't that the same thing?

75 basis points == 0.75%

There is not a single person on the face of Earth who

- knows what basis points are

and

- would interpret that headline as “new_rate = old_rate * 1.0075”