Speech by Chair Powell on monetary policy and price stability
federalreserve.gov
federalreserve.gov
To me, it seems an important distinction whether "excess" cash is going towards buying elastic goods/services (peloton cycles, fancy grills, RTX3080 for gaming, etc) or simply fighting over shortages of inelastic goods (baby formula, bacteriostatic water, shipping space, gasoline, etc).
I suspect that our largest improvement would come from investment in transportation infrastructure for goods -- all of that is super choked right now and it affects everything.
Many people are concerned about the rising price of real-estate and I agree, but I'm not sure interest rates are fine-grained enough for this...ideally Congress could address that with Anti-NIMBY legislation and/or taxes on properties which are not lived in by their owners, which could be directly redistributed to anyone who purchases a new home.
Do you have numbers that show that's what people do when interest rates are low?
I don't have numbers - but my suspicion is that they mostly just speculate on asset prices.
Where was all the investment in the last 20 years that low interest rates should've brought on?
What it did bring on was companies borrowing money to buy-back their shares to return >100% of profits to investors.
And don't even get me started on how negative real interest rates are a negative wealth tax.
> Do you have numbers that show that's what people do when interest rates are low? I don't have numbers - but my suspicion is that they mostly just speculate on asset prices.
I don't know either. I agree with their analysis that we've had an exuberance of speculation on rising assets during a time of unprecendented low interest rates. It just also seems unlikely that rising interest rates will facilitate additional investment towards critical shortages. Maybe this is a problem for Congress more than the fed, I don't know. Would love to hear others opinions.
The Fed generally has pretty coarse tools. Whether the increased monetary supply is spent on "good" or "bad" things is up to more general policy choices made in other parts of the government.
If we want to "make money" and "increase GDP" - lowering interest rates does appear to do that.
But there's no reason you can't "make money" and "increase GDP" and also actually lower productivity and living standards.
Imagine an economy where 90% of the economy is people buying land from each other on debt.
If suddenly the price of money drops 50%, and people can afford to pay 50% more for land (and do) - all things being equal - GDP increases by 50% * 90% = 45%.
If everyone realizes how much money they can make doing this instead of whatever the other 10% of the economy is - say actually working the land to farm apples - then real productivity can drop 100% to 0 - and you still "increase GDP" and people still "make money".
At the same time - maybe everyone dies of starvation shortly thereafter?
I'm not arguing this is actually happening - especially to this degree - but it is easy to see that it is at least possible*.
What I personally find strange is that there are economic schools of thought that just axiomatically conclude that nothing is wrong and these people are rightfully starving even though there are economic schools that prevent starvation and end up with superior output.
You mean it is an implicit tax on liquidity which isn't to be confused with wealth as money is merely a claim to wealth and not wealth itself.
https://datalab.usaspending.gov/americas-finance-guide/defic...
Everything plays a role even if it may not be the primary one.
CPI is such a wack metric. It doesn’t really measure so much the value of the USD as it does “prices of certain things”.
Many of the current shortages (industrial plant failures, food shortages) are due to climate issues. Putin isn't helping, but even without the Russia sanctions, we'd still be facing all sorts of shortages (PVC, microchips, olive/sunflower oil, wheat, mustard, water shortages blocking the Panama Canal, etc, etc).
The root cause of all that is climate change, which is worsening linearly with time, which means the backlogged impact on the economy is increasing quadratically.
> so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates
Because the deficient supply of self licking ice cream cones?
So half the time, the Fed is just some sort of con man, trying to trick the economy into doing what they want through press releases and optimistic predictions, etc.
The other time they are just slowing the economy down for good or bad reasons.
1. Inflation caused by increasing demand (often due to more money coming into the hands of people/companies/institutions)
2. Inflation caused by reduced supply (often due to logistics, productivity drops and reduced trade)
With covid, we had both. At this point, we have far too much money in the hands of speculators and too few producers of goods and services in the world.
The Fed can use interest rates to reduce demand. But they will also reduce supply because many producer businesses will go bust.
I know this is heavy handed but the real policy help at this point is to ensure that there is more money to be made in real production and less in speculation. All the real estate agents, flippers and day traders need to be sent to factories to produce actual things.
Just an FYI, any remaining supply chain issues are not really transportation related at this point. We ship several containers a month from Asia to the ports of LA/Long Beach and we haven't seen delays on either side of the Pacific in a while at this point. The other major issue we faced in 2021 was getting containers out of the port complex and on a truck to their final destination. Those delays have also been resolved at this point.
We're also seeing transportation prices come down. Trucking is still expensive because of fuel costs, but ocean rates are way, way down. The most we paid for a container from Vietnam to LA/LB last year was $22,000. Right now we're getting quotes for $4,600.
I agree, but I think I lean in the opposite direction as you do.
It's relatively easy to produce more Pelotons, grills, and (to a lesser extent) RTX3080s.
It's difficult to produce more wheat and houses. When the price of housing is going up nationwide faster than ~4%, that's probably time to increase interest rates, because supply elasticity won't be coming to the rescue. By the time it filters into rent prices, it's too late and you're doomed to overshoot.
IMO that's the real key to the real estate problem and it should be an escalating process.
Property you live in = 1 rate
1 property you own but don't live in = slightly higher rate (family vacation home perhaps)
All other property you own but don't live in = much higher rate (this is the business tier)
I'm not sure what the solution is. There's probably a tax component to it, but I think second order effects need to be carefully considered.
If it forces sales, you get more home inventory and lower prices.
This is in aggregate, of course; individual landlords may charge less than what individual tenants can bear but across the rental market, landlords extract monopoly rents already.
That's why you will find rents increase proportionately to incomes, not landlord costs. This is highly apparent in New Zealand, where mortgages are not fixed rates for more than 5 years; interest rate changes have little to no impact on rents, but supply and tenant incomes do.
> ...individual landlords may charge less than what individual tenants can bear...
I lived in a supply-constrained city once and my landlord, a nationwide public company, could have charged me significantly more without prompting me to move. I am one individual though and you called out that exception.
However, had I been priced out of the unit in which I lived I would have found a smaller and/or less desirable unit at lower cost. Rental units vary in size and quality.
The existence of individuals who can pay more and the non-fungibilty of rental stock makes me suspect that such taxes will simply be passed on.
The CBO only measured the first effect, but the second is much more important, IMO.
It doesn't do much for housing, but that's mostly a local issue (aka zoning).
It's not very effective because the sum difference is barely a drop in the bucket. It's not enough to significantly impact inflation at the scale of the US economy. Only the Fed's rate hiking is going to do that at this point, as they intentionally attempt to cause a recession to destroy demand.
Compare just the annual US Govt debt accumulation versus the difference between spending increase & tax increase in the act. How much new debt is the US going to take on this year? The Inflation Reduction Act, like so many government programs, warns you that it's a lie and a joke right in the title. The moment they chose that name, they were telling you everything about it: it wasn't an inflation reduction act.
They championed it also as though it was a huge deal for climate change, it's not, that's a lie as well. Climate change is overwhelmingly global as an issue, there's absolutely nothing they can do to meaningfully offset the expansion of emissions elsewhere around the world. If they were serious about climate change, they'd have named the act: Stop China From Building Another Hundred New Coal Power Plants Act.
10s of billions of dollars have been announced for new battery plants to be built in the US and Canada since the announcement of the IRA. It's already having a massive effect.
Taxation should be thought of separately from monetary policy. To put this into perspective, M2 money supply grew from 15.33T on Dec 31 2019 to 21.71T on July 31 2022, a growth of 41% in two years ($6.38T). In 2019 it grew 6.6%. The net revenue of the Inflation Reduction Act is 324 billion over over ten years. It's just not in the same ballpark
> OTOH, it encourages investments in green energy, likely leading to a substantial reduction in the cost of energy in the long term.
Subsidies and investments don't necessarily lead to a reduction in costs. Think about the sectors that have the most public spending in the US (health care through medicare and medicaid, education, real estate via fannie/freddie, etc). These are the fastest growing industries in terms of prices
I disagree. Healthcare isn't necessarily labor intensive. New technologies should make care cheaper. If anything labor efficiencies have made the actual labor required of medical care a lot less. Doctors used to make house calls and spend more time with you. Now you go into a doctor's office, wait up to an hour sometimes, sit in a room, have some lower paid aids take your vitals, get your information, etc and you end up seeing the doctor for 15 min. Doctors see about 20 patients a day and spend normally 15 minutes per patient. Compare that to 50 years ago and you can bet that there have been "labor efficiencies" since that time. That doesn't even account for tele-medicine for routine stuff like getting ear drops for a sick child.
As for education, teachers aren't paid a lot, all the new costs are administration. Education expenses did not grow proportionally to educator's salaries, but far exceeded them, so your theory doesn't hold up.
https://www.excel-medical.com/a-typical-primary-care-physici...
And Baumol doesn't require salaries going up, it works just fine if salaries stay constant while the price of consumer goods goes down.
In both health care and education, the final customer often does not pay. When I go to a doctor and ask them how much something will cost, I get bewildered looks. They rarely hear that question. I don't pay, my insurance pays and I pay some co-pay. Same thing for education. I'm pretty much stuck with my local school district, or if its college, I get subsidized no questions asked student loans.
But compare that to something that's paid out of pocket by the consumer. Consider something like Lasik surgery. It costs about $2-3k per eye an. Pretty incredible considering its relatively new procedure. I can't find a single outpatient surgery covered by insurance that costs that little. Cosmetic surgery is similarly cheap. And the difference is that the Lasik surgery is paid by the consumer and most people would shop around, ask about prices, etc. No subsidized Lasik loans, no insurance coverage, just straight forward pricing.
https://www.marketplace.org/2022/08/25/what-was-the-main-dri...
> Inflation has remained at levels well above the Federal Reserve’s inflation goal of 2% for over a year. Separating the underlying data from the personal consumption expenditures price index into supply- versus demand-driven categories reveals that supply factors explain about half of the run-up in current inflation levels. Demand factors are responsible for about one-third, with the remainder resulting from ambiguous factors. While supply disruptions are widely expected to ease this year, this outcome is highly uncertain.
* https://www.frbsf.org/economic-research/publications/economi...
I'm no economist, but is it really a problem in practice?
Shouldn't stuff with both high prices and inelastic demand be a really attractive target for investment? If you can produce that stuff (before the situation changes), you're almost guaranteed to be able to sell it and at a high profit. So getting capital for it should be relatively easy.
I'm sure higher interest rates will have some effect, but it seems like it wouldn't be enough to discourage investment that much.
The SF Fed published a study a little while ago, "How Much Do Supply and Demand Drive Inflation?":
> Inflation has remained at levels well above the Federal Reserve’s inflation goal of 2% for over a year. Separating the underlying data from the personal consumption expenditures price index into supply- versus demand-driven categories reveals that supply factors explain about half of the run-up in current inflation levels. Demand factors are responsible for about one-third, with the remainder resulting from ambiguous factors. While supply disruptions are widely expected to ease this year, this outcome is highly uncertain.
* https://www.frbsf.org/economic-research/publications/economi...
1. The Fed thinks the green line is declining too fast. (Green line = purchasing power of a nominal USDOLLAR, such as a paper dollar bill, or a zero-interest checking account.)
2. In order to make the green line flatten out a bit, we're going to raise interest rates more, reducing the supply of capital.
3. In the short-term to medium-term, raising interest rates will have an adverse effect on the blue line (bonds), due to interest rate sensitivity.
4. In the medium to long term, the effect on bonds may in fact be positive due to higher interest rates, but this depends on future Fed actions as well. (It seems to me structurally unlikely to create substantially positive real retuns for treasury bonds, at least. Maybe corporate bonds will benefit.)
5. Raising interest rates is intended explicitly to reduce aggregate demand in the short-term to medium-term. This reduces corporate revenues and corporate profits, which should hurt the red line (equities).
6. Raising interest rates also increases the discount rate which is applied to net-present-value (NPV) calculations, which means that future cash flows are discounted more heavily. This should also hurt the red line (equities).
Why is the red line diverging from the blue line, since they seemed to be connected earlier in the graph?
If nothing else, it seems like bonds increasingly require investors to take on long duration risk (and more interest rate sensitivity) in order to realize positive real returns, while short-duration bonds barely or do not even keep up with inflation anymore: https://totalrealreturns.com/s/VFISX,VFITX,VUSTX for a duration comparison on Treasuries.
Large items, like RVs saw a roughly $4k markup (in CA) because they literally drive each one from Indiana. Not to mention everyone is buying them because they are alternatives to expensive homes now.
We really need to get off gasoline and encourage people to build. Messing with inflation with the feds "only tool" is fucking idiotic.
1: The root of inflation is the printing of money
2: No government will reduce the printing of money. It is just too convenient. It is like taxing more and more without getting much complaints.
3: Governments will rather use tricks to lower inflation. Change the definition. Make laws to restrict prices. Subsidize the production of goods to make them cheaper.
Conclusion: The value of money will go down the drain faster and faster forever.
The numbers I see (asset prices and monetary base both going up and up and nothing but up) are in sync with my view.
Burden of proof doesn't mean it default to "you're wrong." It means it defaults to "your position is unfounded." To change it to "you're wrong" requires evidence of your own.
In the context of an argument, this is the same as wrong. You can't use evidence to refute an unfounded argument; there are no supports to attack.
Of course OPs statement is arguably one that is able to be disproven, or at least evidence towards disproving it. Unfortunately, the person claiming it was not sophisticated enough failed to provide that evidence. So in my book, they both made unfounded statements.
Couldn't you have easily proved yourself wrong?
edit: the date was chosen because of today's date, picking the year before the housing bubble burst as a start, then taking a 10 year period.
From 20007 to 2017, prices of pretty much everything I look at doubled. Shares, gold, coffee (when you order it in a cafe), real estate ...
Money lost half of its buying power and you tell me inflation went up by only 1.75%?
One of the ideas kicking around is that there is so much extra low-interest money kicking around that people snapped up real estate with bidding wars, perhaps as an inflation hedge. That one makes sense to me. But discounting the price of real estate through taxation disincentives doesn't make sense, because the one paying the tax is ultimately the property owner(s). So the owner is still paying the price, only now he's splitting the payment check to two entities: he's paying (1) the previous owner and (2)a rent-seeking tax machine enforced by men with guns. Any cost savings would effectively be by turning it into a hybrid ownership, hybrid open ended lease with society being the part owner, and thus could be considered a cheapened form of ownership rather than the same thing for better value.
In effect, LVT is saying "land is cheaper... if you're only buying N% of it and society owns the rest." Well of course it's true... but remember you're paying your rent-seeking landlord (government) your annual lease payment on their (100-N)% ownership. Move N to 0, and you now don't have to spend anything on the land, but everyone is a serf to government ownership of land. In effect, LVT is fractional communism of the land, with extremes of N=100% being full individual property rights and N=0% being full communism.
That is an unsophisticated view. Lowering inflation by 'changing the definition' is like trying to lose weight by switching from pounds to kilos. The measurement is not the thing being measured. Do politicians play around with highlighting different measures? Of course they do - but that is a (ineffective) solution to a political problem not an economic one.
Lots of money in Japan, no inflation:
This is only half the story. Inflation is measured based on the prices of goods in the wild. Yes, prices can increase when the value of a dollar falls based on the supply of dollars increasing. At the same time, the price of a good can increase when supply of the good decreases. We're in an era of unprecedented supply chain disruption due to covid, so it would be wrong to forget to account for this side of the story WRT inflation.
If on the other hand it's printing money (as I'd expect from the trillions of free money in recent months) it should only get worse. What I observe is more consistent with money printing than disruption of supply chains
Both China (most importantly) and Russia (to a lesser extent) have not recovered. China seems to be getting worse with a historic once-in-a-century heatwave and drought that is currently destroying productivity.
However, "prices are sticky", they go up quickly and go down slowly. Companies aren't going to race to bring their margins back down, if people are paying X then they'll keep prices at X. Especially if they are worried that prices might continue increasing in the future - this is the "inertial" part of inertial inflation, it isn't just about inflation itself but about managing expectations in the economy around future inflation. So far there supposedly hasn't been a big inertial component but who knows.
Really what we needed to discourage it was a massive windfall profits tax - the Fed is also basically saying that we need actual fiscal policy here and that they don't really have the tools to manage this like they want - but this gets back to "there are 48 definite no votes for any bill, and we're dependent on what we can get those last 2 senators to agree to". The fed is using the only levers it has, and that lever is "a gut-shot to aggregate demand for the next decade", that is not the right policy tool but it's the only one that congress can't block.
This is why you don't throw gasoline on the fire during 2018-2019 when the economy is already going gangbusters, because when the economy inevitably dipped, suddenly those policy tools like government spending become much more "expensive" to implement when there's already tons of money sloshing around the economy.
Most Western countries try to keep inflation low, and succeed. If what you were saying were true, wouldn't we have hyperinflation everywhere? Right now we're having a supply shock, but that's not normal.
Not exactly. It's the "printing of money" that increases faster than the economic output/demand curve that causes inflation.
You can definitely be "printing money" in a deflationary environment as well.
You can also see a general price level increase with the same money supply, if the velocity of money increases, or if the supply of goods goes down.
Money is just another good. It has its own demand and supply. Ideally, you want those to match - which is what central banks try to do.
"Hard-currency advocated" (gold standard people) have been arguing against this concept since its inception, but, their system doesn't have a way to manage the money supply, which leads to frequent recessions. The gold period is marked by recessions that took place every couple years - and that was in a 19th century economy that moved far slower and was far less interconnected.
The gold standard doesn't solve the short term inflation deflation problem because to solve that you must ensure that for every buyer there is a seller that can handle the demand and the opposite, that for every seller there is also a buyer at any given point in time.
The purpose of saving is to sell today and buy tomorrow and trade places with someone that wants to buy today and sell tomorrow.
When you are saving for retirement you must sell to a future worker that will take care of you when you are old and that future worker must take on debt and buy from you. Then when you retire the positions reverse, you are buying and he is selling.
Only if those positions are in balance do you actually get no inflation.
But nobody even wants to think about coordinating production and consumption schedules because they fooled themselves into thinking liquid money does it automatically when the fact that we have inflation and deflation really just shows that it doesn't work.
People save more than others want to be in debt leading to deflation. Or people take on more debt than others want to save and reduce consumption leading to competition over products and services and higher prices aka inflation.
Well the Fed just reduced the effective rate it was printing money quite substantially by switching to Quantitative Tightening and increasing rates.
You could even argue that with QT, not only is the Fed no longer printing money, but they are taking money that was printed back out of circulation and effectively destroying it.
This matches up with the double digit mortgage rates that were common back then.
This is correct [1]. The American economy has grown, decade to decade, every decade of its existence. If the economy grows and the money supply does not, bad things happen
From 1970 to 1980, the metric jumped to 300% (an increase of 200%). From 1980 to 1990, the metric jumped to 210% (an increase of 110%). Whereas from 2010 to 2020 (just before covid), the metric jumped about to about 190% (an increase of 90%). But this is not obvious on the graph.
They should use log scale.
2. The covid jump is something else. But I can understand why they spent money then.
(Even from 1960s to 1970s they went up by 100% or to 200%, so I buy your point, just do not like the FRed's visualization)
Edit: Just plotted these in Excel. Bush-1 and Clinton-1 were the only years with flat curve on logarithmic basis, every other era is a gradual increase.
I plotted the growth of the above mentioned data, and I compared each value with its value exactly 4 years back. So I compared Jan 1, 2022 with Jan 1, 2018. The idea is to see if there are trends based on presidential terms or crises. Since the data is still plotted monthly, you can pick and choose an arbitrary start date - some people say it takes time for presidencies to show results, so whatever yardstick you use, use it for all. Rest: see for yourself as long as these links are allowed :(
Currently they are tightening, yes. Let's see how long they'll keep this up when not only the US but also Europe and China are caught up in this recession that's currently lurking.
I say we're just seeing a short intermezzo of expensive money that'll soon be over again (no later than 3 years from now) when the world is going to be hit by crisis after crisis that politicians prefer to solve with yet more money.
This is mostly true most of the time, but this is not the only story. There is also a supply side to the equation: if supply can expand it can suck up a lot of money that is being printed without causing inflation.
I highly recommend Lyn Alden's overviews and analysis. Here is her recent one on inflation (a subsection that points to broad money vs inflation -- the trend you indicate as well as some exceptions). https://www.lynalden.com/inflation/#supply
Another one she wrote a couple of years ago on the global reserve currency situation is IMO relevant as well. https://www.lynalden.com/fraying-petrodollar-system/
But very long term and holistic, systemic inflation, that 2-3% annual target, has very little to do with supply and is almost exclusively printing money. It's a slow drip, a covert tax on savers and gift to debtors, that the government can feed off indefinitely so long as they never get too overleveraged and forced to print money too fast to cover their obligations, shattering the trust that supports the system.
#2 is wrong. The fed can print money using QE and low interest rate loans. They can destroy money via reversing the easing and high interest rates. They've done this. Congress can destroy money through taxes. The Inflation Reduction Act does this.
It's always more complicated than that:
Stop printing money? After a few years population will increase, the workforce will be larger, and there won't be enough money to go around. This will result in deflation. (And is supported by evidence of what happened when people used physical gold and silver as money. As population went up, and people stockpiled, deflation happened.)
In this case, part of the cause (in the US) is a smaller work force. Not only did people retire early at the beginning of the pandemic, the baby boomers are retiring. This means there's less workers to go around. The remaining workers can demand more money.
The next step would be to then ask ourselves why the government has to constantly micromanage the economy, the answer has very little to do with the fact that inflation is a tax but rather because of structural problems in the economy.
Governments always run a deficit for a fear of a recession worse than 2008. Why is government debt the only way to prevent a financial crisis? Why does it never get better but exponentially worse?
If you just say money printing people turn their brains off and think it is as simple as political overspending.
The root of inflation is an increase in the cost of goods & services.
If the money supply increased, but the head of every company willfully elected to ignore this (due to patriotic duty, for instance) and continue charging the same for their goods & services, then inflation would not occur.
This is exactly what's happening in countries like Venezuela and Argentina with high inflation right now. The government has set an official forex exchange rate to try to make believe their currency is more valuable than it actually is, while the black market currency exchange gives you the true exchange rate that is reflected by real world markets.
In some cases, this situation is fine, because the government just needs the fake numbers to push a political narrative. More commonly, I feel like this action starts a downward spiral of trust in a society's political class or the political system itself. This is probably a big thing that led to the collapse of communism.
No government constraint/restriction was mentioned in the hypothetical scenario I constructed.
This assumes an increase in spending rather than saving and/or paying down debt(s).
That's a tautology.
Money can be spent on many things besides goods & services. Consider, for instance: securities, land/real estate, entire businesses, foreign currency, bribes, and gifts (of money).
> > That's a tautology.
> No, it's not. Inflation, by definition, is a decrease in the purchasing power of money.
That's the definition, and it's the same as "an increase in the cost of goods & services".
"The root [cause] of X is [definition of X]" is very much a tautology.
"Purchasing power" is therefore not limited to goods & services, but I defined inflation as an increase in the cost of goods & services alone.
A tautology this is not.
The Fed can only control the too much money side of the equation. In the case of inflation do to a supply side shock to an inelastic good, that is necessities with few or no substitutes, there is nothing the Fed can do.
https://www.nationalpriorities.org/analysis/2015/presidents-...
We can no longer afford that. Government pensions should be abolished and the retirement age raised.
that's the problem with mixing social security and medicare in with the rest of the "general budget items"... it's specifically built to be a self-funding program and people have been paying taxes for decades (regardless of whether you think the government has mismanaged it) with the expectation of receiving the benefit.
(note that nowhere here have I said "lockbox", I am firmly aware that it's a "pay as you go" concern at the end of the day, and it's irrelevant to this point, which regards the human factor.)
In contrast, let's say the military is not specifically funded with any specific tax that was intended to go towards that program. It's just something we spend money on. That's what a general budget item is, and that's where the general budget largely gets spent. Medicare/social security are handled differently.
Japan enters the chat
* https://fred.stlouisfed.org/graph/?g=PA7P
> 2: No government will reduce the printing of money. It is just too convenient. It is like taxing more and more without getting much complaints.
It's not the government that creates money, but rather private banks:
* https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625
I may agree with the rest, but not with this one. The definition of inflation (or CPI) is owned by the Bureau of Labor Statistics, which is obviously part of the Government. Still, nobody in this bureau will get a bonus or a salary increase, or anything really, if they tweak the definition. Moreover, how many times can the Government change the definition?
Completely wrong, the gold standard had a mostly fixed supply that was growing over time but the price went up over the long term but there was inflation over the short term anyway.
Deflation happens when people save more than others have a desire to spend and invest. Inflation happens when people spend and invest more than other people want to save.
The other problem is that no printing is happening, that operation simply doesn't exist beyond the creation of physical dollar bills.
>No government will reduce the printing of money
Do you live under a rock? Germany was running a hard debt brake before the pandemic and right now the debt isn't excessive either. How about you actually look what is happening around the world before making universal claims?
>The value of money will go down the drain faster and faster forever.
What did you expect, did you really think the opposite is going to happen? That you are going to enslave the future faster and faster forever?
There were several months where officials continued to refer to inflation as "transitory," when it was obviously anything but. I wonder how much that was deliberately misleading, in an attempt to stem inflation by adjusting people's expectations. And I wonder how bad it might have gotten if officials had told the full truth.
"Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy"
"Volcker's Federal Reserve board elicited the strongest political attacks and most widespread protests in the history of the Federal Reserve (unlike any protests experienced since 1922), due to the effects of high interest rates on the construction, farming, and industrial sectors, culminating in indebted farmers driving their tractors onto C Street NW in Washington, D.C. and blockading the Eccles Building. US monetary policy eased in 1982, helping lead to a resumption of economic growth"
TL;DR it's going to get ugly
Unless prices go down and you end up losing a bunch of money (or worse, underwater).
That's the problem, rates and housing prices don't exist in isolation. People don't generally care about the actual sticker price of the house, they care about what the monthly payment is going to be, so lower interest rates imply willingness to bid higher... and the opposite is also true, higher interest rates mean people can't afford to bid as high and sale prices go down.
Essentially, people are locked in at higher principal/lower interest, but now the housing market is moving towards lower principal/higher interest, and that means that a huge amount of housing "net worth" (whether current or future) just evaporated for a lot of people. Your $300k house is now a $250k house again and you just lost all that money you spent years paying down (inflation ain't the only way for value to evaporate).
If interest rates double, then so does the interest portion of the mortgage for new homebuyers. It's not quite double, since some of the mortgage goes to principal, but it'll be almost double. And with the interest rate so low... it doesn't make much in "real terms" to make a big relative increase. I refi'd at... 2.75%? So if the fed raises interest rates from 0% to 2%, that nearly doubles my interest rate. Obviously I am not buying today but other people are, and that still determines the value of my asset.
I suppose it's the old "don't buy the house as an investment, buy it to lock in a rent that you can afford" but it's definitely been worrying me. Thankfully the last few years have put me far enough ahead that I'm not in any danger even with a big dip.
And I suppose the counterargument is that institutional buyers are still making big cash offers, so maybe there won't be that much of a dip. But without the hike, values would have gone higher, it's still a loss of expected value. And the institutional investors aspect of the market is really not a great thing either right now.
> Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions.
The Fed has some tools, most notably the interest rate, that can probably slow down inflation but at the cost of probably slowing down growth. A big question has been the degree to which the Fed will give up growth in order to try to reduce inflation. This speech makes it sound like the Fed is likely to trade off a lot of growth in order to hit inflation targets.
What does that mean for most people? Probably bad things in the short term.
> While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.
It makes it sound like the Fed is willing to inflict some damage to hit its inflation target. This isn’t a change exactly, but it’s a confirmation about what lots of people have speculated might happen.
This is an attack on the working class in roughly the same way trickle down economics is a subsidy of the working class.
What he's saying there is they're willing to crank interest rates even if it slows the economy down and pushes unemployment sky-high. The Fed's dual mandates are price stability and full employment and they've just signaled which horse they're gonna back.
This is the first time in living memory that we've seen a market where labor is valuable and has the upper hand in negotiations and the wealthy absolutely will not abide that.
Most of the problem is still pandemic-related supply shocks and supply chain bubbles, plus energy going nuts from the russia thing. It truly is transitory and not based on changes to long-term market fundamentals. But the needle was starting to move up on worker compensation/etc and they gotta put a stop to that, can't let the plebs get a taste for financial stability.
- Employment is very high, as it stands. The intention of easy money was to maintain purchasing power, and prevent household shocks due to government shutdowns during the pandemic. It is being used by companies to game the market, and win as evidenced by this change, producing demand-side inflation.
- Productivity is low, as measured presumably by per-capita GDP projections. Indicating continued economic dislocations between prices and corporate activities. Investments are concentrating into unproductive sectors. Capital inflows aren't improving productivity, so the cost of productivity is going up -- supply-side inflation.
- Households and businesses are still gobbling up a lot of debt OR a lot of savings, spurred on by USD inflation -- to employ those individuals, to live outside reasonable means -- or preparing "for the worst." This is the manifestation of the K-shaped recovery, where activities are significantly altered, in anticipation of near-term economic changes. Acquisitions probably would highlight this, but the branches of government have talked FAANG out of this but Broadcom-VMWare highlights a counterexample.
The narrative that is latched onto by investors pertains to the Fed's intention to hike rates until employment begins to fall, he states that they're planning on "overshooting" the fed-funds rate, so that business investment will fall, and concentrate onto more reliable business-models. Jerome Powell also invoked Paul Volkert, basically to signal that risk assets are no longer a key-metric being observed.
With all the bullshit startups over the past decade or two, I thought this was accepted as the new normal.
Bottom line, the product improved.
When Zillow rips the housing sector an expensive and unfunded demand for renovation -- this is where the "growth" investment thesis starts to break down, a massive acquisition of hard goods, made possible because of risk-asset price inflation.
Bottom line, the product is worse for the foreseeable.
It's icky, but thankfully these types of radioactive business models are getting identified sooner rather than later.
See: https://www.wsj.com/articles/jerome-powell-should-learn-from...
But then you have those that argue that inflation is a bit more transitory and different than the 1970s, as it is more supply chain induced. And if we keep interest rates high for too long, it will hurt the economy, as cheap money isn't the cause of inflation.
See: https://www.wsj.com/articles/inflation-isnt-transitory-but-i...
[edit: which according to a comment below is a mix of copy paste and a 180 degree misreading, lol. I'd be curious if the synopsis would be better had I pasted his remarks rather than passed a link in, but I'm not at my desk to try rn.]
The Federal Reserve is responsible for ensuring that the economy is stable and that inflation is low. In order to do this, they use a number of tools, one of which is interest rates.
When the economy is doing well, the Fed will raise interest rates in order to prevent inflation from getting too high. When the economy is not doing well, the Fed will lower interest rates in order to encourage spending and help the economy grow.
The Fed has been keeping interest rates low for a while now because the economy has not been doing well. However, as the economy has begun to improve, the Fed has been slowly raising interest rates.
In his speech, Powell said that the Fed plans to continue to raise interest rates slowly as the economy continues to improve. However, he also said that the Fed is prepared to lower interest rates again if the economy begins to slow down.
Because I think the former would justifiably be very, very, very happy to see the latter take a big haircut since the latter's money is a large part of what's propping up asset prices (and the prices of many consumer goods) and directly reducing the access the former has to such things.
Inflation could cause the price of houses to skyrocket (and the value of your down payment to tank), and interest rates will certainly increase for the next few years.
Current prices reflect people's best guess as to which way things will move.
If you want to buy as an investment, I suggest diversifying as much as possible. If you already have enough assets to tolerate the additional risk and can still get a sub-5% mortgage, then maybe buy an investment property right now (in expectation, it's still free money at those rates, and, even if the market tanks, the price of the house will probably bounce back in the long term).
Since rent has been going up about as fast as the total cost of a mortgage has, it doesn't really affect my decision.
Personally I'm giving it about a year to see where things are next summer.
I'm hopeful that the interest rate increase causes prices to drop but real estate prices (like wages) are sticky. Prices may come down, but sellers could also just decide to hold off and hoard. Hard to tell.
From https://en.wikipedia.org/wiki/Paul_Volcker#Chairman_of_the_F...:
"Volcker's Federal Reserve board elicited the strongest political attacks and most widespread protests in the history of the Federal Reserve (unlike any protests experienced since 1922), due to the effects of high interest rates on the construction, farming, and industrial sectors, culminating in indebted farmers driving their tractors onto C Street NW in Washington, D.C. and blockading the Eccles Building. US monetary policy eased in 1982, helping lead to a resumption of economic growth"
TL;DR it's going to get ugly
*allegedly. We have no data on what would have happened if we'd let the banks fail, put their C-suites in jail and used bailout money as a safety net.