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Comment by nostromo | Hacker News Reader

> Does the Fed deserve credit for handling the situation "correctly" despite lots of potential criticisms both ways? Probably.

Fed causes massive problem, and then eventually stops it from getting worse... Hooray?

Inflation is still twice the target rate at 4%.

Every dollar has lost about 18% of it's buying power since 2020. If you haven't received an 18% salary increase in that time, the Fed printed you into a pay cut.

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I think it's unfair to pin this on the Fed.

Most of the inflation appeared to come from a mix of massive fiscal stimulus and supply chains that got blown up by the pandemic, so large increases in demand coupled with decreased capacity to supply, driving up pricing for capacity.

Arguably increases in some asset prices could be attributed to QE, but the story doesn't really hold water for CPI ex-housing.

As an aside, I don't even think this course of events was a mistake. It was much better to have some inflation from huge stimulus but avert economic disaster, and then deal with the inflation through the relief valve of higher interest rates. There is no relief valve for total demand destruction.

While I agree that fiscal stimulus, which drove excess demand and thus shortages was the primary culprit in inflation, the Fed deserves more blame due to having the ability to unilaterally make the decision to intervene, yet choosing not to.

The bar for getting something passed in congress is much higher. Powell was also publicly requesting congress to pass a second (or was it third?) massive stimulus after the economy was already on a strong path to recovery. Since then he's declined to comment on fiscal policy, even when it was clear that fiscal policy was driving inflation.

https://rooseveltinstitute.org/2021/02/25/fed-chair-powell-m...

Don't forget the Ukraine war which pushed oil and natural gas prices through the roof as travel really started to open back up. Since energy is an input to most of the economy 50-100% increases in pricing will have a significant effect, and so will 50-100% decreases (though market prices fall more slowly than costs allowing higher profits).

https://www.macrotrends.net/2500/crude-oil-vs-natural-gas-ch...

People who think quantitative easing is "money printing" haven't looked at how reserves work (and how circulating money is created through loans) or at the correlation of QE/QT on either inflation or deflation in the US, the EU, or Japan. Now it does increase liquidity and that may increase asset prices slowly.

https://research.stlouisfed.org/publications/economic-synops...

The Fed did keep rates a bit low for a while, they will also keep them a bit high for a while since they are "data driven" and the data always lags. We seem to be lucky this time that delayed infrastructure stimulus (not the pandemic business handouts) is offsetting decrease in credit, but it's unlikely "this time is different" so we'll almost certainly have a recession to kill inflation expectations and a "banking event" that causes Fed rates to fall.

Interestingly, the treasury spend down caused by debt ceiling shenanigans seems to have lowered long term rates for a few months which also helped loans/spending in the short term.

I remember energy providers here in the UK went under way before Ukraine war because of electricity price spike. When war started we had another spike but it was short and prices are now at the same level as before the war but still higher than in July 2021.

Some data here: https://www.ecb.europa.eu/pub/economic-bulletin/focus/2022/h...

Why is the narrative everywhere still that prices are higher because of the war in Ukraine?

Well, it may be political, but the reason that European gas prices rose dramatically in Dec 2021 (there were many articles in Bloomberg and FT) was due to Gazprom restricting supply... it's almost as if they new something? Maybe they were reading the NYT.

https://www.nytimes.com/2021/12/23/us/politics/russia-ukrain...

"European prices skyrocketed when the dominant external supplier, Gazprom, started to withhold supplies in Q4 2021."

I really appreciate your Chart A where one can see that prices went back down until the war started and then spiked 1.5x higher and that only because of a couple of quite mild winters. It's certainly reasonable to make the case that investment in Oil and Gas fell quite a bit from 2019 (economists were expecting a recession in 2020 before COVID), but that didn't drive rapid reductions in supply and historically high prices... a war did.

Look at gas and electricity prices. They started rising way before Q4.

When we were all shaking about electricity prices mid year 2021 no one ever mentioned anything about Russia, Ukraine or Gazprom as being the sole contributor.

"The rise in costs has been put down to a number of factors, including a cold winter earlier this year which left gas stocks depleted, as well as refineries in the US being shut down by Category 4 Hurricane Ida, according to industry analysts.

High demand for liquefied natural gas from Asia and a drop in supplies from Russia have also contributed to the price rise."

https://news.sky.com/story/why-is-a-rise-in-gas-prices-pushi...

I guess you're saying that oil at $100/barrel makes sense and I wouldn't disagree... That's about where it's been +/-$20 except during the crazy swings caused by the war and pandemic (remember it went NEGATIVE) events. Those don't really effect electricity prices so much, though. The gas market, however, is permanently altered.

You weren't going to get to %150 higher prices for gas (which drives marginal electricity prices) in Dec 21 or %200 higher prices for gas in Feb 22 without Gazprom supplies being cut. The winter before was plenty cold in 2021 (coldest since 2010) and it only caused a %60 higher price for electricity and 30% higher for gas for a month. We're over a year into Ukraine and gas is stable at 50% higher than it's start which was the previous temporary winter peak. It'll go crazy again this winter if it's cold, but that will also be transitory and probably come back down to a 50-60% higher new normal barring "events".

Because the true reason is political, and politicians are the ones writing the narrative.

> ... a mix of massive fiscal stimulus and supply chains that got blown up by the pandemic

If pandemic-related supply chain issues are really a major factor in the inflation we're seeing, with time we'd expect most prices to be returning to pre-pandemic levels, or at least close. I don't think I've heard anyone seriously suggest that could happen. Instead, we're celebrating a small reduction in the slope of a line that has been and continues to be moving up at an alarmingly steep angle.

And while you could argue that fiscal stimulus isn't a direct action from the fed, it's certainly related and can ultimately be attributed to the same group of delusional people in the driver's seat.

A major factor is missing - lack of competition due to decades of unrestrained mergers allowed large price increase sending corporate profits to record levels

Some of the volatility can be blamed on the Fed; It's a major component of the money supply that is less bureaucratic than congress.

So, when Covid shutdowns hit the US, it could react (with its largest balance sheet ever), but it also could have reacted to valuation increases, it could have reacted to first and second round stimulus packages by reducing its equity holdings, it could have reacted to positivity rates and vaccine uptake.

Though the lack of the legislative and executive acting in the US can be blamed as well; That could mean, incentivizing baby boomers to stay in the workforce, increasing immigration (where food, lawn maintenance, retail industries are having worker shortages as workers have moved to warehouses, technology, and delivery), or the child tax care credit helping parents stay in the workforce (possibly with more linkage to employment), and lastly temporary tariffs where possible to reduce consumer demand for imports (via ~ taxes).

"Firefighters cause massive water damage when fighting massive fire, news at 11"

Jerome Powell himself admitted they overdid stimulus, massively contributing to inflation.

Much better to overdo stimulus in a crisis and prevent a cratering economy (and human suffering) than the opposite. Stimulus is hard, politically, basically only possible at the peak of the crisis. Raising rates to undo it after you know the stimulus did its job is easy.

Under-stimulating is what happened in 2008+ thanks to Republican obstruction and fear of electoral "anger", and we got years of extra suffering as a result.

But you also have to consider the counterfactual: we did way too little stimulus after the GFC in 2008, leading to the economy being depressed much longer than it needed to be. Obviously it would've been nice if we had done exactly the right amount of stimulus, and easy to armchair-quarterback in retrospect and say the "right amount" was obvious, but at the time it was not.

> Inflation is still twice the target rate at 4%

First of all, the article says inflation is at 3%.

Sounds like you're over-reacting here. 4% may be "double" (if that's the number you want to go with), but it's not a huge difference. Some economists even think the target is too low, and 3% would be completely fine. On top of that 1) it takes time for all these interest rate hikes to give their full effect, 2) inflation is currently going down, 3) killing jobs just to get slightly closer to a magic number no one really knows is essential to achieve is odd.

Inflation is already low and under control. Being alarmist about (not actually) 4% is odd.

For reference, 2% inflation over 30 years is an 82% rise in prices. 4% inflation over 30 years is a 232% rise in prices. Many people underestimate the effect of compounding interest and how much of a difference rates of return make.

Many people underestimate the effect of compounding unemployment.

Unemployment doesn't compound, though. The highest it can go is 100%, and in practice people have a strong incentive to get new jobs and make new jobs long before it reaches that point. Unemployment has a negative feedback loop: the more people who are unemployed, the more wages drop, which makes it more cost effective to employ people, which reduces unemployment. Inflation has a positive feedback loop: the higher prices rise, the more people need to hunt for raises to make ends meet, which means higher costs and even higher prices. Or alternatively, the more time they spend looking for new jobs, meaning less actual work done, meaning lower productivity, less output, greater scarcity, and higher prices.

That was the big realization of the late 70s and early 80s. When the 70s inflation first got going in the late 60s, people thought "Eh, a little inflation is preferable to mass unemployment." By the end of the 70s, they'd learned that if you choose inflation, you get both, because people can't make prudent investments in the future if prices are not stable.

The effects of unemployment on people compounds. It screws them over during their life, and affects the economy, over and over.

Inflation is under control, and there is no expectation of high inflation, so we do not have the same trade off as in the 70s at all.

Core inflation is 4.8%, and that’s the number that’s usually used as a benchmark.

These headlines are really starting to get on my nerves. When NPR was talking about it last night they threw a line in there about core inflation but the rest the few minutes was celebratory about hitting 3%.

Ah, yes, the classic "the Fed is supposed to micromanage everything".

Aren't neoclassicals supposed to deny the influence of money on the economy?

That's a pretty naive way to characterize the economic system, which is designed to include inflation in order to motivate participation in the economy. If you're hiding wads of cash in a suitcase under your bed, you either don't understand this or you've chosen to lock in reduced buying power year after year to avoid a greater loss due to a market collapse.

Rich people don't hide wads of cash in their mattress and aren't hurt by inflation.

Poor people do live paycheck to paycheck, and often their paychecks lag inflation. And that's why inflation usually hurts the poor first and foremost.

If the Fed and it's quantitative easing caused the problem, then you'd expect to see more inflation in countries with more easing and less in countries with less easing.

There is a correlation between the amount easing and inflation, but it is very low, making it quite clear that the Fed was not the primary cause.

Not really, finance is global now. Money printing in the US can and does drive up prices in China, and vice-versa.

Globalization of finance and trade strengthens the effect, it doesn't weaken it.

If you double the number of dollars floating around compared to Euros, the dollar:euro exchange rate adjusts accordingly, so anything priced in dollars would now be ~50% cheaper in Europe.

Source?

It's a relatively easily falsifiable statement, so stop JAQing off.

> Fed causes massive problem, and then eventually stops it from getting worse... Hooray?

Was it the Fed or was it Congress through policy? Congress needed to do something in the response to the pandemic for the people, right? Therefore, why does Congress deserve blame? They helped people out, didn't they?

Firefighting tends to be a good career strategy. Everyone remembers the heroic rescue, few point fingers.

More like the federal government causes massive problem and Fed comes to the rescue

Both were the problem. The Federal Reserve buying up 1.5 trillion dollars of mortgages around 2020, for example, surely contribute to housing cost inflation.

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

It was eye-opening to watch how the news reported the two prongs of stimulus.

Garden-hose of money aimed at poor people? Wailing, gnashing of teeth, pearl clutching, hand wringing.

Fire-hose of money aimed at rich people? Complete silence. On the few occasions it was reported, it was dropped like a boring but inevitable fact without any accompanying inflation rhetoric, despite the much larger dollar amounts.

That's because "Fire-hose of money aimed at rich people?" (I assume you mean QE with that) does not cause CPI inflation which is the main problem.

You'd need a 22% raise to make up for the dollar only being worth $0.82.

.82 x 1.22 ~= 1

Or did I read that wrong?

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