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Comment by floathub | Hacker News Reader

The claim that, "when interest rates rise, all asset prices must fall" seems, uhm, somewhat off. If this were true, it would be trivial to stop and reverse inflation (i.e. deflate) with any increase in interest rates (?).

While it's certainly useful to think about prices as signals that, "embed an interest rate derivative", it seems a stretch to claim every single one of those derivatives is perfectly negatively correlated with interest rate changes.

[EDIT: change "interest price" to "interest rate"]

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> The claim that, "when interest rates rise, all asset prices must fall" seems, uhm, somewhat off.

It’s a necessary condition of the discounted cash flow asset pricing model.

https://en.wikipedia.org/wiki/Discounted_cash_flow?wprov=sft...

Yes, a future stream of cash flows will be worth less now if interest rates rise, because the time value of money has changed. But not every asset (let alone every price) represents a future stream of cash flows.

Monetary policy could be performed by a couple of NAND gates if it were genuinely the case that any interest rates rise would necessarily lower the price of everything.

It's basically true. A simple example is housing. People will generally borrow as much as they're allowed and spend all of that on the best house they can afford. That tends to raise property prices as the borrowed money chases housing stock. That's been very evident these last years.

The opposite occurs when interest rates go up, people can no longer borrow enough to pay asking prices, demand falls and prices fall to meet demand.

There are obviously other factors involved but the basic relationship holds.

The mechanism is mentioned by another, but the idea is that higher interest rates reduce the present value of future cash flows, resulting in lower asset prices. However, this analysis is holding everything equal, which is not true in real life. For instance, if higher interest rates are due to higher inflation expectations reflecting stronger nominal growth, then some assets might do better in such an environment.

Your second argument is that it would be trivial to stop and reverse inflation if it were true, but even if it were true it would not be so easy. The way we measure inflation is based on the prices paid for goods and services of consumer goods. If the only change from an interest rate hike were on asset prices, then this doesn't directly impact prices of consumer goods.

> it would be trivial to stop and reverse inflation (i.e. deflate) with any increase in interest rates (?).

As trivial as it sounds it is exactly the premise with which fed operates. Their mandate is price stability (~2% inflation) with low unemployment rate. And interest rate is a key lever they have. So yes they are going to keep rising rates until they see inflation come down to around 2%. They harp on this at every FOMC meeting[1]. They believe raising rates to around 4.75% will bring down inflation to 2%.

Will be interesting to see how it plays out.

[1] https://www.federalreserve.gov/newsevents/pressreleases/mone...

That was on February 1st though. They also have a mandate to keep the financial system stable.

> The claim that, "when interest rates rise, all asset prices must fall" seems, uhm, somewhat off.

Of course there are instruments like interest rate derivatives where you can make money when rates rise, but he's talking about ordinary assets like bonds and equities.

The reason all prices do indeed embed an interest rate is that all future cash flows need to be valued somehow, and those values go down as interest rates go up. So your equity that (somehow) is guaranteed to pay 10c next year is worth less if interest rates go up, just like if it were a bond.

Yes, but you don't want to deflate for other (often worse) reasons. So could they raise interest rates to 10% and kill inflation? Easily. The trick is in raising them to the appropriate level to curb inflation without suffocating the economy.

They have already raised rates enough to suffocate the economy; this episode is just one example. They have not raised rates enough to kill inflation, because the inflation we're seeing today is due to input costs and monopoly rents. The interest rate could be 15% and it wouldn't change those facts.

The real reason interest rates are rising is to kill the infant unionization trend in its crib. SVB is just collateral damage.

Not sure why you wrote this since nearly all prices are falling right now, directly due to interest rate hikes.

How could you conclude that an interest rate hikes wouldn't reduce all asset prices?

If "nearly all prices" really were falling, wouldn't that show up on this chart?

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

Bond prices fall. Not all assets.

"If this were true, it would be trivial to stop and reverse inflation (i.e. deflate) with any increase in interest rates"

Well, that is the strategy of the Fed. Raise interest rates when we experience too much inflation.

The Fed strategy is to reduce the rate of growth (1st derivative) or prices, not reduce the actual price level (which would be deflationary). And that's non-trivial for many reasons, including the fact that not every price signal responds the same to short term interest rate movements.

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