Hacker News Reader

Comment by vlovich123 | Hacker News Reader

> That means people can take out loans, start companies and buy equipment to grow the economy. If we had 0% inflation all of that activity becomes much harder.

Then why did firms love to take out loans and grow during 0% rates and start shedding workers as soon as the rates went up?

View on HN

I think you might be conflating the interest rate's that the federal reserve sets and the inflation rate.

The federal reserve rate is essentially how much the US pay's their debtors. Bank's use this as a benchmark for how much they lend to their own borrowers.

The inflation rate is a calculation done based on a basket of goods. if the price of that basket of goods goes up, inflation is up. if it goes down, inflation is down.

When the federal reserve lowers their rates, it makes it easier to get money, and therefore the price of the basket of goods goes up.

When they make their rates higher, money is harder to get, and the price of the basket of goods goes down. The only problem with this is that there is also less money for labor, which means that unemployment goes up. The Feds job is to balance these two things.

To nit pick I would assert that the price basket is more dependent on the actually supply demand constraints but when there is free floating supply to be utilized but demand cannot catch. Than lowering interest doesn't necessary cause an increase in costs i.e inflation but can actually ruin the other way for some goods. That's why despite inflation being rough the actual cost in value of TV is so far down the economy grew and can now cheaply satisfy that demand. I don't think this was a great argument because I didn't link fed actions to that growth.

A better negative example is though in the US a large issue in the 1970s we had Regan Stagflation was austerity weakened demand and the feds levers simply couldn't deal with that type of inflation. The fed cannot directly influence solving supply issues only direct investment does that

You're right that stagflation shows the Fed can’t fix supply shocks with interest rates alone, but calling it “Reagan stagflation” and blaming austerity doesn't quite pass muster to me. The 1970s mess was mostly caused by oil shocks and entrenched inflation. The Volcker rate hikes (and Reagan’s early years) were the painful cleanup, not the cause.

I don't know Stagflation persists into the 1980s and well into it thanks to austerity even after the oil crisis is settle its a classic there is a crash the supply shock is over lets not spend money approach that lead to another recession in 1982. Iran's war ends in 1979. And most of the 1980s see a massive glut of oil[1] yet the US entered the Reagan Recession from 1982-1985. It is resolved by 1985 but austerity in that time is the opposite response needed and it shows in the GDP growth lagging. It might be poorly timed linked in name calling stagflation in Reagan stagflation since the inflation mostly ends by 1981 but its certainly not a Reagan boom

[1] https://en.wikipedia.org/wiki/1980s_oil_glut

Calling the early ’80s “Reagan stagflation” isn’t quite right. Stagflation means high inflation and high unemployment at the same time. By 1981–82, inflation was already collapsing — from nearly 14% in 1980 to about 3% by 1983. What remained was a brutal recession with high unemployment, caused by Volcker’s deliberate rate hikes to kill inflation. Painful, yes, but that’s not stagflation anymore. The stagflation era ended with the oil shocks of the ’70s; the early ’80s was the hangover cure, not the disease.

That's 0% _interest_ rates, not inflation rates. Ultra-low interest rates because a thing precisely to avoid deflation during the financial crisis, and kind of stuck around ever since.

Yeah this is the right idea the fed sets interest rates to hit inflation target. This has to do with there ability to influence lending by setting there interest rates appropriately.

The whole idea being that if we have low interest rates we can lower the barrier to growth as much as possible without actually causing inflation but if the economy becomes constrained and the extra money is just chasing fewer things the fed has to increase interest rates to decrease free money so inflation doesn't spike. They honestly did a really good job too getting from 9%->3% is impressive and staying there despite the massive instability in pricy that Tariffs cause is a testament to that philosophy.

Reply on news.ycombinator.com