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>Whether the Fed actually has the technical tools to do this is another question.

its unlikely the fed is reactive enough in the short term to have any real effect on inflation presuming its tooling is effective. the interest rate hike took six months to implement, and began with a quarter of one percent increase. this was before earnings reports for the prior christmas holiday but november itself was a sobering enough red flag that Powell should have immediately pushed for 1% or more. its taken us nearly a year to arrive at the 3% we're at now, but in my opinion this inflation wont stop for another year, and it wont stop even at clinton-era interest rates of almost 6%. Quantitative easing --and the feds decade long addiction to it-- make this thoroughly uncharted territory. the interest rate push will likely be the straw that breaks corporate real estate, no matter how hard Bloomberg pounds his fists and demands a return to cubicles in his newspaper. this will likely tumble back into another residential housing or auto lending crisis. The student loan forgiveness push and reforms on wage garnishment also send a clear signal that our nations 1.73 trillion dollar nickelodeon of perpetual youth debt is becoming a serious threat as well.

I agree on this thesis, the crux of the problem and I have told many people about this, was the handouts given during covid. It was totally scattershot and should have been more targeted. In addition states like California and others extended payouts way longer than they should have(and had way over-generous unemployment) which led to entire industries being completely short staffed. This led to extreme raises in wages and started a spiral of inflation that started at the bottom of the economic tiers and has worked its way up. Couple that with China doing zero tolerance covid lockdowns our supply chain is completely strangled which is also adding fuel to the fire, and making prices shoot up even further. Real estate sales have completely frozen as prices for all houses are priced in at a 3% interest rate and buyers will not entertain 25-30% cuts in price.

Against this backdrop California plans on distributing $9.5B to any family who makes under a certain amount of money($1k each), I expect this huge infusion of cash to make inflation even worse and I do not know where this will go except that it will not be pretty.

The empirical evidence for wage rises causing inflation is so weak, few economists take it seriously as an argument against wage rises.

The evidence for supply chain issues - as you mention - and price gouging being contributory causes is much more convincing. If you are not convinced that price gouging is going on, consider profit levels in energy companies in recent months.

Please don't blame this on workers who if anything need to be paid more, and paying them more will not impact inflation, only make it easier to cope with. It may even bring inflation down if jobs in supply chains become more attractive and force profiteers to become more competitive.

Blaming inflation on price gouging seems way too facile and subjective. What is price gouging anyway? In the years that energy companies lost money were they doing the reverse of gouging?

Why is it more facile and subjective to blame the real visible increases in consumer product and material supply prices than to blame "extreme raises in wages starting a spiral of inflation that started at the bottom of the economic tiers and has worked its way up?"

I just don't see there being any more reasonable objective cause and effect to that claim than the claim made by the commenter you are replying to. On the other hand in my own industry, prices for materials like lumber and steel have shot up massively causing major follow-on effects, and nobody at the steel mills are blaming worker salary for it. They're blaming the costs of the raw materials. And the people on the job site aren't blaming the tradespeople wages for the project going over budget, they're blaming the high cost of the steel showing up on site, late.

When workers are an issue for project delivery or budget it's usually not what they're charging, it's just availability. There are simply not enough field workers out there who can drive steel rivets or manage a punchlist. In fact, I hear rising wages brought up as a potential way to attract more people to the those field roles, because right now there are not enough people entering those roles.

None of that explains what price gouging is or how to distinguish it from normal market price variations.

Usually when people say “price gouging” they are making a moral claim — the price being charged is Wrong — not a technical claim.

So you can’t distinguish it without sharing the same morals as the speaker, and you therefore should “know it when you see it”.

No moral claim required.

When price increases exceed the increases in costs/raw-goods... then it's "greedflation", not "price gouging". Increasing profit margins are also a good signal of it.

Inflation and Price Gouging - https://www.nytimes.com/2022/06/14/briefing/inflation-supply...

Are Large Corporate Profit Margins Causing Inflation? - https://www.nytimes.com/2022/06/22/opinion/inflation-corpora...

I Listened In on Big Business. It’s Profiting From Inflation, and You’re Paying for It. - https://www.nytimes.com/2022/05/05/opinion/us-companies-infl...

Are you suggesting that profit margins should be fixed at current levels and never change?

I think they are suggesting that profit margins should be zero (if not negative)… and in my experience most people taking these kinds of positions would prefer if your takehome pay was just a little bit less than theirs.

So pretty much doubling down on the point: it’s gouging when I say it is.

You made the reply I was thinking of.

It seems a bit too on the nose for the literati on HN to have determined the definitive cause of inflation today is in-demand workers requesting fair compensation, as of the last 2 years.

Software engineer salaries have skyrocketed unbelievably over the last 20 years. What crisis is that responsible for?

housing affordability crises around IT hubs? (sure, the ultimate cause is fear of density, but the proximate cause was a lot of income concentrating in so relatively few people's hands in relatively small areas.)

notice that the real problem is the supply-demand inequality, not that real wages went up for a sector. (and to have a crisis it's almost always necessary for some other conditions to be present to make this one particular imbalance a very significant one that then drives other markets, eg. in case of housing that condition is the artificially very limited supply.)

the COVID stimulus checks were big, but not that big individually compared to the US economy, sectors, regions. people who needed it spent it, who did not put it into meme stocks, or bought something, inflating the price of luxury stuff like high end GPUs. that's most of it. (around 2020 July)

what put the whole economy into a freefall was ~1M excess dead and the rising energy prices giving a big speedup to the already falling supply-side dominos.

Revenues from products with near zero marginal cost.

Agree. It’s important to look at retirement rates and numbers, too. It’s the end of the boomer generations workforce participation (except in the senate?). The following generations really are smaller.

Couple that with actual crackdowns on immigrations, and you get actual labor supply problems for some roles and industries. This has knock on effects that raise wages.

Couple this with inflation in CPI, and you get workers in a good place to negotiate raises to cancel out inflation and then actually increase real salaries commensurate with contribution.

Net, labor price increases are a symptom of labor supply and cpi. Labor is not driving inflation.

This is all moot for the people who suffer most-- those on fixed incomes and those without incomes that can be increased.

That's why it's important to stop inflation immediately. It puts the cost of living farther and farther away from those who can't keep up today.

If a businessman “games the system”, for example by structuring their companies in a way that avoids paying millions in taxes, they are “savvy”.

When poor people get even the smallest bit ahead, “they are getting scattershot handouts”.

You are talking about families earning less than 2k/month. In California. I honestly doubt that can cover transportation expenses alone in SF.

9.5bn was what Wework was “worth”. Some poor people getting slightly ahead is not the problem.

More generous unemployment was blamed heavily for the worker shortage, but that has been pretty thoroughly debunked by the data. Those benefits have long expired and worker shortages remain. Not to mention, states that ended unemployment extensions early saw very little improvement. Something like just a 3-4% reduction. (not 3-4 percentage points reduction, a reduction of 3-4% compared to states that kept extended unemployment benefits.

IIRC, Powell compared the Feds current efforts to tame inflation similar efforts in the 70s/80s, so fast in that context is over a few years instead of over a decade or more.

Money is just a different word for credit. Credit comes from credibility, or trust.

If a bank trusts a company that they can repay a loan, they'll extend the loan. But if there's a credibility problem, they won't. At the margin, when interest rates go up some companies will cease to be profitable. Banks know intimately how profitable their borrowers are. Even if they have doubts, the income statements will show. So, when the times comes to refinance the loan, the rate may be increased, or the credit line decreased, or new covenants may be put in place, or some collateral required, or various combinations of these.

Corporations (and especially those rated "high yield", or non-investment grade) will see a double-whammy: not only interest rates will have gone up significantly (by 4% early next year), but also their credit spread will go up (see [1], on average it has gone from 3% at the beginning of 2022 to 5% now, and it will keep going up).

That creates the start of a feedback loop: with the increased burden of servicing debt, companies will become less profitable, some will start cutting headcount (just look at the HN posts lately and see how often layoffs are mentioned).

Of course, there's the other feedback loop: higher interest rates means higher discounting of future corporate dividends, dividends which will be smaller anyway, so that means lower stock prices. People will see their savings taking a hit.

And then, a combination of lower savings and higher job uncertainty will lead to lower consumer spending. Or demand destruction.

Which is what the Fed wants.

Make no mistake: the Fed is still the most powerful actor in the financial markets. By far. It has all the tools needed to fight the inflation, and then some.

[1] https://fred.stlouisfed.org/series/BAMLH0A0HYM2

> Whether the Fed actually has the technical tools to do this is another question. Most of what it does is mass psychology - trying to convince the markets of its resolve one way or another.

Who else can buy up trillions of t-bills and mortgages at a moments notice? When they do this, it drops rates. The Fed offered up historically cheap money to borrowers to keep the economy rolling during the pandemic and housing crisis.

> But to the US Treasury, they're just a mechanism to fund the deficit.

The deficit doesn't get funded as well when the Fed is not buying. It's not merely a technicality. Someone else will have to fill the hole left behind by the Fed leaving the market, and that usually means higher rates to draw in money from elsewhere to feed the t-bill and mortgage market.

>Bank reserves haven't mattered for years as money, but that's pretty much the only lever the Fed holds.

And this is why they aren't raising it more. If they do, and that doesn't work, people will act like the train conductor broke off the handle.

> Whether the Fed actually has the technical tools to do this is another question.

Short term interest rates being higher means that loans which roll over and refi on a scheduled basis (ARMs being one example) will have their interest payments move much higher. That will create delinquencies and stress in the financial markets eventually, but it will take some time for those loans to wind up getting refinanced at higher rates and for the loans to go delinquent. Watch for CMBS delinquencies to start climbing.

When the Fed says that they need to hold rates through 2023 and not cut people should also believe them. That's how they force the weak hands to capitulate and be liquidated. Everyone will naturally try to kick their cans down the road as long as they can, so it won't happen overnight.

ARMs make up a tiny percentage of mortgages. They are also usually fixed rate for the first 7 or 10 years. How many other types of revolving loans are there?

Auto loans are not normally thought of as revolving lines of credit, but many consumers treat them as such. As soon as one car is paid off (or even before), they trade it in for a new one with a new loan (sometimes rolling over negative equity).

The used auto market has been hot the last couple years, so it’s hard to predict what happens. But since most consumers buy based on the monthly payment, higher rates mean smaller, less luxurious car, which has implications for the profitability of auto manufacturers.

Also, some consumers have been using their homes as piggy banks, refinancing each time the value increases. When happens to consumer spending when they can’t do that?

> It holds another - margin stock trading requirements, but that path has all but been forsaken

I didn’t know this, could you explain when it’s last been used, if ever? Could they theoretically drastically raise margin requirements for some stocks and lower it for others to encourage sectors to be rebalanced?

From this 2000 article:

>The recent rise in margin credit has focused attention on the Federal Reserve’s margin requirements for purchasing equities with borrowed funds, which has been at 50% since 1974. In November and December of 1999, margin credit grew very rapidly, outpacing the sizable appreciation in the overall stock market. And in January 2000, it grew further while the stock market’s valuation dropped, leaving the ratio of margin credit to market capitalization at its highest level in the past 29 years. This Economic Letter discusses the recent trend in margin credit and the merits of using margin requirements as a policy tool.

> ...

> The Securities Exchange Act of 1934 mandated federal regulation of purchasing securities on margin. The margin requirement was motivated by the concern that credit-financed securities speculation helped fuel the run-up in stock prices prior to the stock market crash of 1929. The act viewed the Federal Reserve as responsible for managing the availability of credit in the economy, so the Fed was charged with setting margin requirements for securities purchases. The Securities Exchange Commission was directed to enforce those regulations.

https://www.frbsf.org/economic-research/publications/economi...

According to Wikipedia, the rate hasn't been changed since the 1970s:

> Regulation T governs the extension of credit by securities brokers and dealers in the United States.[1] Its best-known function is the control of margin requirements for stocks bought on margin. The initial margin requirement for such margin stock purchases has been 50%[2] since 1974,[3] but Regulation T gives the Federal Reserve the authority to change this percentage. Raising the margin requirement ostensibly reduces risk in the financial system by reducing the potential leverage and total buying power of investors. Conversely, lowering the margin requirement increases systemic risk by expanding the buying power and leverage available to investors. Since 1974, the Federal Reserve has not deemed it necessary to adjust the margin requirement despite periodic extremes of price volatility in the equities markets.[4]

https://en.wikipedia.org/wiki/Regulation_T

Given the absolute neglect of the mandate it was given on this, I suspect the Fed views even mere talk of increasing margin rates as the nuclear option. But if the usual roll call of psyops fail to deliver, this thing is there in its back pocket. I imagine the mere threat would cut 20% off the S&P overnight.

> Bank reserves haven't mattered for years as money, but that's pretty much the only lever the Fed holds.

The FED can make they matter again with a pen strike. It doesn't matter because they don't want it to matter.

Not really. A consequence of doing so would be breaking the inter-bank payment system, which is to say crashing the economy with no survivors. The Fed simply must provide adequate reserves to support the payment system. The so-called "dual mandate" of controlling employment and inflation rates is necessarily secondary to that. I mean theoretically sure they could do whatever, but the end result would be the dissolution or restructuring of the Fed by Congress, or worse.

> Most of what it does is mass psychology - trying to convince the markets of its resolve one way or another.

Inflation isn't the result of mass psychology. It's the result of too much money sloshing around in the economy, thanks to trillions in deficit spending.

Regardless of the starting point, inflation can persist due to mass psychology. See the mass psychology experiment in the mid-1990s that worked!() to constrain inflation in Brazil. They did have to introduce a new currency that was pegged against the dollar (essentially). See: https://www.bcb.gov.br/en/monetarypolicy/realplan

Inflation has many causes and psychology is one of them. If you think prices are going to keep rising, you will be more likely to spend your money to "lock in" the price right now. If enough people do this, it adds demand to the system which keeps prices high and prolongs inflation. If too much money in the economy alone caused inflation it would been apparent between 2008-2020.

Why is there no deflation from mass psychology?

BTW, you cannot imagine yourself into having more money.

> Why is there no deflation from mass psychology?

There is: that is the ECON101 feedback model of deflation causing money under the mattress reducing money supply causing deflation. That doesn’t occur because modern money systems don’t have a fixed supply of printed money; also governments actively prevent deflation so it isn’t seen.

“Opposite effects occur when the supply of money falls or when its rate of growth declines. Economic activity declines and either disinflation (reduced inflation) or deflation (falling prices) results”.

Rate of growth can decline due to consumer sentiment (psychology).

> BTW, you cannot imagine yourself into having more money.

Strawman.

Consumer sentiment (psychology) can become more positive, people borrow more (increase mortgages or buy a “better” house) and spend more (increasing the money supply).

> It's the result of too much money sloshing around in the economy, thanks to trillions in deficit spending.

Or it's because of oil suddenly getting expensive:

* https://en.wikipedia.org/wiki/Cost-push_inflation

Cost-push inflation is a myth. The proof is that there is no general price decrease when oil prices drop.

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