Fed hikes rates as inflation worries push up bond yields
reuters.com
reuters.com
This is how Republicans have a reputation for being economically savvy despite actual evidence to the contrary, because the general population doesn’t understand that economics runs on a time delay.
I basically agree. I don't care for DJT, but I can see how getting his "second term" underway after his first one could have been better. His four years away allowed him to stew and plan and respond.
Fed actions typically take a few years to be felt, regardless of administration.
[0] Yes, I know that the Republicans said that they were going to cut spending to match the tax cuts, but that never ends up happening.
There's a fair argument to be made that the Democrats could/should have reversed these disastrous fiscal policies when they gained power, but it's important to be wary of Murc's Law while also acknowledging doing so would also burn a lot of political capital Democrats never seem to have much of.
The American electorate is a grade school child constantly evaluating which parent it likes the most. One tells you that you can eat as much candy as you like and play video games all night (neither of which hit you until the following day), while the other occasionally tells you to eat your vegetables, do your homework, and clean your room.
Both parties have run an increasing deficit, with the only outlier being a small amount of time in the late 90s. The deficit is largely caused by social security outlays, medicare/medicaid outlays, and military spending, none of which are going to meaningfully change under either party
Where change in deficit is the final budget deficit - starting budget deficit
So, every Republican president runs an increasing deficit and every Democrat president runs a decreasing deficit.
https://www.macrotrends.net/2496/national-debt-growth-by-yea...
Also, inflation wasn’t temporary
Between his first term and his second term to date (2+ more years to go), Trump is responsible for more that one quarter (29%) of US debt (USD 11.6T / 40T):
* https://time.com/article/2026/08/21/national-debt-trump-bide...
There was a bit of a mitigating circumstance of COVID (for Trump and Biden), which caused the debt to jump for many countries as well (and not just the US), but it's not like Trump et co are helping the math along with all the tax cuts and asking for a US$ >1T military budget.
But I would say a large reason why the US is in the fiscal position it is now in is because of Trump and a GOP Congress. (See also tax cuts under Bush 43 and Reagan; Bush 41 raised them a bit.)
The one thing both parties agree on though is running up a massive deficit
Assuming you're talking about the Senate filibuster, then this can be changed or removed by simple majority vote. It's not in the Constitution, just a rule that the Senate adopted.
Like, personally I think that even sans filibuster, the Senate would move much slower than the House, because of election cycles.
Ultimately the president is enabled or constrained by laws enacted by congress
You might argue it is inflationary.
It is highly unusual to argue that taxation is inflationary since the whole point of inflation is to reduce demand.
On an earlier HN economic story, someone provided data showing that this is entirely the responsibility of Republican administrations. Going back to Eisenhower, the Deficit has only increased under Republican Presidents and only decreased under Democratic ones (with one exception, Johnson was slightly positive in Deficit increase).
Presidents cannot pass fiscal policy. They can only sign or veto new fiscal policies or act on existing policies passed by congress that give them fiscal latitude
I’ve explained this many times in this thread. We’ve reached the heat death of useful discussion so this will be my final comment in this thread
I've not heard this expression before; can someone explain it to me?
(It moved from 3.5% - 3.75% to 3.75% - 4%, the US uses a range, not a fixed number.)
But this one is something that gets results almost immediately. We will see what it does in 2 or 3 months, not years.
Inflation numbers, companies firing, and the magnitude of fictional numbers on financial markets.
Lots and lots of things are slower to react, but those 3 are quite big and hard to ignore.
Here is data: https://fred.stlouisfed.org/series/JTSLDR
Inflation is a bit higher, but not shockingly so, here is the data:
https://fred.stlouisfed.org/series/CPIAUCSL#
In terms of "fictional numbers on wall street", I don't see any real data there, but if you have access to something then please share.
What means that the US is still paying banks to take loans. They just fixed it so it pays very, very little.
This particular crisis is quite abrupt, caused by a sharp jump in the price of oil. Most presidents don't really deserve either the credit or fault that they receive on the economy, but in this case there's a very clear and direct connection.
Yes, it happens to both sides. People convince themselves their side always makes right decisions, the other side always wrong.
The truth is that the secret sauce is in the pendulum going back and forth. The excesses of one side are soon erased by the other. It is working, as it has for many years.
I recall reading something from axios or similar, talking about how a CEO said a "nice light recession right now would be perfect for us" or something to that effect.
"this" (raising the fed rate by .25%) is not what causes a recession in 2 years, it's what led to "this" (the ill-advised, badly-planned, Iran war) + tariffs + popping AI bubble that will do that.
And it's how Democrats have a reputation for being the "wrongly victimized underdog / misunderstood savior" despite actual evidence to the contrary, because the general population doesn’t understand that economics runs on a time delay.
Honestly it seems your post is heavy on politics but I am not seeing an actual argument anywhere in there.
My canned response to people being upset at various policies or ratios, whether it is inflation, or bond yields, or market movements, is to ask them what they think the correct value should be. Stop complaining about the movement and instead ask them for their target. You think a 4% FedFunds is too high or too low? What do you think the correct value is and why? You think the stock market is too high or too low, what do you think the correct value of the index should be?
Most people, who were just moments ago vociferously complaining about a movement, when asked this question fall silent, because they have no idea what the target should be, and because they have no idea about the target, they really have no business complaining about movement. Instead, they use the movement as a springboard to air their ideological beefs. But if you are going to tie some thesis to a rate hike, you better be able to explain what you think the correct rate should be and why. I'm waiting.
Personally, I think a 4% rate is perfectly fine. 5% may even be warranted, and historically this has not been a high rate, if you assume, say, 2.5% inflation and 2% GDP growth, this is a pretty reasonable place to be.
There is a separate question though - is that state of the world good or bad for people? Is it better or worse today than it was yesterday? What can we do - collectively - to push it in a direction that best serves our collective interests? These are valid questions to ask, and I think each takes us further in the direction of politics.
So what can we collective do with money so I feel most happy. This may be the most important question of all to ask.
I didn’t see anyone claim a single 25 bps hike will cause a recession.
The 30 day FFR futures (/ZQ) curve is pricing in an 80% chance of two more hikes by the March 2027 meeting and a 70% chance of 3 or 4 hikes by Sept 2027’s meeting. So, 50 bps predicted in the next 6 months and 25-50 bps more within one year.
Source is the CME Fedwatch tool: https://www.cmegroup.com/markets/interest-rates/cme-fedwatch...
I think we’ll need to go to 5%+ within the next two years if fuel costs remain elevated.
Basically you have an inflation shock and you want the reaction function to be higher, so if inflation is 1% too high, you want a 1.5% or 2% rate hike. If inflation is 1% too low, you want a 1.5% or 2% rate cut. The reaction function has to be greater than the deviation from target, but this gives you price stability, it doesn't require a recession, although it may cause a recession.
Using interest rates for this kind of inflation is guaranteed to cause a recession.
Unfortunately they discovered that the size of monetary aggregates was outside the control of central banks, these were demand determined by the public's desire for money balances. So all attempts to control the growth of monetary aggregates failed.
Having an inability to control anything else, the central banks turned to the one thing they could control -- overnight interest interest rates, and from that, bond yields more generally. That is the one tool in their toolbox.
Do you think other tools exist?
Yet here we are 50 years later suffering booms and busts just like before. Nobody seems to want to acknowledge the failure of 50 years of industrialisation destruction that in hindsight was the inevitable outcome of open trade and the retreat of governments.
To answer the question, yes I think there are other options and trade barriers need to be part of that conversation.
For the elephant in the room, the current inflation woes are caused by oil price increase, which is a direct outcome of deliberate US policy.
Really the problem is that everyone wants to make lots of money (economic growth) so they can spend more (increase consumption) but without anyone else raising their prices as a result. Unsquareable circle.
Not just Trump, Republicans as a whole. They are not fiscally conservative at all, and their culture wars and religious crusades are going to bankrupt the nation.
They'll sell you up a rope to corporate donors asking for deregulation. And we've seen exactly what happens when there is money to be made at the expense of other people's lives: spoiler alert, people like money more than they care about other people's health.
How does raising rates hurt mortgage holders? They locked in their interest rate when they got the mortgage?
Maybe find a better canned response? US debt has never been higher, and because of this even rates that are below historic highs can cause economic chaos.
We are seeing asset bubbles across the board in this economy, in housing, in equities, auto loans, etc. It turns out that if you make something cheap, people buy more of it, and that includes the government.
Bond prices shooting up is a result of market losing trust in US, or it's ability to not default.
Dollar is famous backed by $700T military. But the world has seen how it failed to secure a strait.
The current US government has broken all kind of promises. I want to highlight two in particular - free trade and immigration.
World economy has benefited for decades on the promises of free trade. The tariffs have eroded the promise and trust.
The government is also openly supporting elements who are hostile to immigrants. Immigrants are the backbone of US economy, has been for over hundred years. Immigrating to the US requires years of preparation, long term planning, and giving up on other luxuries and opportunities. When the government starts breaking promises by changing rules and moving the goalposts overnight, it discourages participation.
You know a nation that does have those things other than the US? Switzerland, which is why a lot of people use swiss Francs, even though Switzerland does not have a huge military. People need to stop reading Graber and others who have no economic training and don't understand global balance of payment accounting. Having a large military does not translate into people wanting your currency, otherwise China, North Korea, and Russia would have well used international currencies, rather than being forced to use the currency of their rivals.
The US dollar is propped up by constant US dollar liquidity related to the fact that you need it to trade significant quantities of oil with the vast majority of producers. That situation was held up by the US' military might. Starting shit with Iran and being unable to finish it means there's no reason for oil producing countries to keep financing american debt on the cheap. What are they going to do? Restrict their own access to crude?
There's more to it, but the USD for gas scheme is a big structural chunk of the financial house of card. You break that and the rest won't hold up very long. And it's not like other structural parts of what makes the USD the global reserve currency aren't getting eroded either. Fed independence stands there glaringly obvious.
The leaked, then, declassified emails about Gaddafi and how his "Gold Dinar" was considered a threat really opens your eyes on why the Corporate States maintains a very big stick to hit anyone they don't like in the world and most especially nations who were foolish enough to disarm, stupidly trusting the Corporate States.
This is Hacker News, we should understand what a PID controller is.
The economy is the "plant". The variable of interest, inflation, is the output of the plant. The government interest rate is the input. As inflation varies around the target FOMC rate, the Fed adjusts the rate. If inflation is over 2%, we should expect rate hikes, regardless of what the current rate is.
This is a fairly simple and very effective system that has worked in most Western countries and the Eurozone since the 90s.
However, note that the "recession" claim is also partly correct: the reason rate hikes work to reduce inflation is that they move the economy growth rate down, in the direction of (but not necessarily into!) recession.
Firstly a rate hike is as much a reaction to circumstances as it is a cause. It follows changes to the financial environment. As much as the current US Administration wanted a rate drop, circumstances dictated the opposite.
Secondly, it might not be isolated. These rates move by small increments, but there are usually several moves in succession, up to 8 times a year. Compare two or three small hikes to two or three small drops and the difference starts to add up. "A 0.25% rate hike" is small, but it indicates a change in direction. The article notes that it is "for the first time since 2023".
The OP that you’re criticizing is simply making a prediction, and he doesn’t work at the fed.
I think that one obvious question that no one asked him, is why not cancel the post FOMC press conference if he opposes forward guidance and won't even explain what data guides his vote when asked about it.
This is very, very unlikely. The US would probably suffer more, given how much AI related expenditure there is. The EZ mostly wouldn't notice, and China is already basically in a depression that it's desperately trying to export its way out of (which seems unlikely without them doing something about all the underwater property debt).
As a result of this many local government pushed money into car/electronics/whatever export industries. This lead to vicious competition, and many of the exporters are tapped out of Chinese markets (vicious competition) so they are attempting to export as much as possible (which is rational).
Looking at things more broadly, one could argue that lots of the reason for the vicious competition is precisely that many Chinese people are still in loads of debt from the property bust (much like Irish/Greek/Spanish people were after their property busts).
The central government is pushing the exporting companies hard, as they don't want to have to inject loads of money into the economy (apart from local support of exporters).
This makes sense from the government perspective as they want to be able to build everything that they need (so the US/EU can't screw them), but it's pretty bad for the chinese people, many of whom are not spending (there's been some deflation over the past 5 years).
So, in many ways the Chinese economy is not in a good state, even lots of the exporters/industrial companies are doing badly, hence why they are focusing on exports.
And because Xi is basically leader for life, the likelihood is that these policies won't change until he dies.
The Fed tightening the money supply isn’t going to materially bring prices down, because the money supply isn’t driving the price increases.
Inflation is just a change in the ratio of money to stuff. You can reduce inflation by increasing the stuff or reducing the money, and cause it by doing the opposite. There's no requirement that the solution is applied to "the same factor", either works.
Sure, if you're wanting to assign blame or worried about externalities these things start to matter. But monetary policy is a perfectly fine tool for dealing with inflation, regardless of the cause.
Note: inflation causes prices to rise, but that doesn't mean that all changes in price are caused by inflation.
We saw this during COVID, the prices of things shot through the roof because of a combination of supply-chain shocks as well as the already well capitalized seizing the opportunity to spend their war chests locking down as much of the available supply as possible, which resulted in consolidation, which resulted in less available supply.
The random trade wars directly cause goods to cost more for absolutely no good reason whatsoever, it’s just a tax masquerading as a price increase, but the Fed deals in stabilizing prices, not taxes. So, it changing the money supply parameters does nothing.
The weakening of the international trade position of the USD writ large also causes prices to go up for no good reason, and nothing about that is going to be resolved by the Fed fiddling with the money supply parameters because it has to do with the stability and reliability of the U.S. as a trustworthy geopolitical operator, which the Fed can do next to nothing about.
The inflation being experienced as price instability/increases is being induced acutely by terrible fiscal & trade policy, but the Fed is acting to try to “fix it” using monetary policy, which won’t work at all. So, what’s the point? Just to look like it’s doing something?
If one side of a ratio is fluctuating (for whatever reason) the ratio's value can be stabilized by making corresponding adjustments to the other side. Amount of goods drops 10%? Reduce the money supply by 10%, bam!, no inflation.
There may be all sorts of policy or political reasons for not doing this, but that's not the same thing as saying that it's necessarily ineffective because the inflation in question is the wrong "flavor".
That's something that's interesting to debate. Especially given recent experience on the opposite side when loosened COVID monetary supply in response to supply limitation boomeranged into inflation by turbocharging demand.
Ultimately though, tighter monetary policy will (full stop, no if's) act as a brake on inflation, explicitly because it will reduce aggregate demand. Less money to chase goods => some demanders stop trying => lower prices.
That 'demanders stopping' is often also an economic slowdown is a different issue.
Interest rates rising aren't going to fix these sources of inflation.
It usually isn't. That doesn't change that raising rates should slow down credit creation a bit. That reduces demand in a supply-constrained economy. It also reduces risk appetites, which helps in a perilous world. (Finally, it gives rate-cutting headroom for when someone levered blows up.)
I mean, what would that actually look like? The Fed is insulated from democratic accountability, for very good reasons, but flipside of that is that their powers are intentionally limited. If they had the same immunity to public opinion but with the power to address supply shocks, that would quickly veer into tyranny.
It's a careful balancing act and there is no perfect solution. What's supposed to happen is that Congress acts on supply-shock driven inflation, but this current Congress would rather eat a bag of broken glass than actually govern, which the Fed can't really do anything about.
It doesn’t have to do anything to monetary policy when monetary policy isn’t the problem. It can do nothing.
It’s not the Fed’s job to try to fix terrible fiscal & trade policy, but that’s now what it’s basically trying to do. So, it’s become a political function by virtue of the political apparatus offloading the consequences of its idiocy onto the Fed to clean up after it with a set of tools that can’t even actually do the job.
The country - particularly this industry, information technology - got addicted to cheap cash. Worse, people didn't want to pay any of it back in tax, so bond yields are going to go up on the debt that was issued to cover deficit spending.
Should be interesting to see how this impacts the AI hyper-scalers. They were already burning through cash like a furnace and were running out of people to borrow from, thus the IPO hopes.
looks very similar to 2007-2008 - high rates plus an wide economy segment with very large debt. Now, the interesting question - did anybody "too large to fail" do (or got exposed in some other ways to) leveraged CDS on the hyperscalers bonds and private debt.
If they dont pay it back in tax, they pay it back in debasement of their savings and entitlements
Market forces like inflation aren't a person exerting control over them. They're the results of humans acting within social structures. These people have control over social structures; they're the elite. They can counter that market force with some other market force. Taxes? That's cold, hard math. There's no way around it, no feeling of agency to be had. So while it might be harder to avoid, it's not the financial effect that they worry about, because they have enough money to weather that. It's the feeling of obligation and powerlessness in the face of others that they can't brook.
Now we have a bunch of people who think that ZIRP was the norm. The industry's full of people who would not, and could not, have made their fortunes if they had to have gone to a bank to get another loan at 5% to make companies like Uber work. At some point, the answer would have been no, and they'd be just like every other failed business person instead of a member of the Cult of the Founder.
The US is going to debase itself endlessly through spend-print-spend-print. At some point they may load up enough debt that the economy suffers a gradual heat death, in the style of Japan, wherein too much of your national capital is going to debt maintenance, sitting in a low yield blackhole sucking the dynamism out of your system (instead of going to productive use, business expansion, R&D, et al).
There's absolutely nothing particularly interesting or special about the direction the US is going. It's very, very, very easy to see what's coming and has been for ~20 years (since Bush nearly doubled the size of the Federal Government and blew up our finances with simultaneous tax cuts + massive spending expansion, we've never turned back from the bleed).
Gold has gone up ~10x since the early Bush years precisely because of the USD debasement, that's the reduction in value in the dollar being represented in the ultimate store of value. All of it has been remarkably predictable. I've been chirping about it forever here and there's nothing special about my insight either, this stuff is plain as day national econ 101.
We were 10 years from paying off the national debt when Clinton left office. 10 years!
I say this as someone who thinks Bush was an absolute idiot and would love to see the government shrunk.
TSA is basically a jobs program, what happens if we get rid of it?
To be fair, if the US government had continued paying off the debt, the only way the (global) books would've balanced would've been for the US populace and businesses to take on waaaaayyyyyy more debt. Not sure if that would've been better.
(For a much better explanation of this, read Trade Wars are Class Wars).
---
The counterintuitive part is that a lower Fed rate doesn't necessarily mean cheaper borrowing for the government. The Fed sets an overnight rate; someone lending for ten years cares about inflation and interest rates over those ten years. Keeping short-term rates low won't necessarily reassure that lender. [1]
It also helps to distinguish the government's debt from a giant credit card. Existing fixed-rate bonds keep their agreed interest payments. Higher borrowing costs feed into the budget as old debt matures and gets refinanced, and as new debt is issued. The pain accumulates rather than arriving all at once. [2]
Nor does a larger interest bill automatically require "printing money." Treasury borrowing and Fed money creation are separate decisions. [3]
The difficult question is how to contain inflation without causing more economic damage than necessary. A large debt load makes that tradeoff more expensive; it doesn't make either option painless.
[1] https://www.federalreserve.gov/monetarypolicy/monetary-polic...
[2] https://www.treasurydirect.gov/marketable-securities/treasur...
[3] https://www.federalreserve.gov/faqs/how-does-the-federal-res...
Best thing we can hope for here is Trump sees an obvious way out of this: return the economy to a predicable machine, reduce spending, tax the ultra wealthy, and ditch tariffs. But I don't think much of that's likely to occur.
We're in unchartered territory in many ways. Good luck.
Although it is the third world that is going to take the hit, the wealthy nations will bid up the price of oil to ensure they continue to get it, the poorer nations will be priced out. What is an annoyance in the west -- say needing to delay a major purchase or postpone a vacation or reduce expenses - translates to famine and deindustrialization in the global south.
Maybe it's not such a good idea to be waging war against major resource exporting nations, the US and Europe are now sanctioning about half of the global resource exporting nations, and the only benefit of this is higher prices in our domestic economies and China coming in to sign trade deals for discounted Russian and Iranian oil.
KSA also needs to lay off the Houthis and lift the embargo, it's long past time that they give up trying to control who runs Yemen.
Fun ride =
Oil is going up, possibly for a long time, which will have a big inflationary effect on everything. And it appears the USA government has lost the conflict it started and effectively given control over key oil delivery channels to Iran. Not to mention Saudia facing real issues from rebel groups / Yemen (simplification).
Government debt is high in several key economies, and the bond market is being saturated with AI-related bonds, as well as possibly people finally tired of lending the USA/France/UK money at low rates and demanding higher ones. And with higher interest rates and bonds rolling over it means more and more money going to pay for the debt, rather than core services.
Wild cards lurking in the bushes... AI, AGI, RSI.
And yonder you have a nuclear power floundering; its only source of hard currency is being rightfully degraded, and its leadership delusional.
And the one to watch IMO... Russian wheat export ability: wheat prices are up considerably, and combined with inflation from oil, this is the kind of stuff that creates waves of political change like the Arab Spring.
Those cash reserves are held by banks which the Fed funds rate pays interest on (what was hiked).
Meanwhile the fixed rate debt from QE remains the same.
Not to mention the US debt is _high_ as hell and bond yields mean that's more expensive.
And the country is run by a broken fool who has no interest or ability to fix any of that.
Trump will be gone in three years, but you'll still have an electorate that wants more free stuff while also getting tax cuts. There is zero appetite for fiscal reform in the U.S. The geometric growth rate of U.S. debt has been consistent since 2010 and will remain so when AOC is President: https://usafacts.org/answers/how-much-debt-does-the-us-have/...
The problem is that the top 25% isn’t an “out group” in either coalition. You have Facebook PMs who vote blue and guys who own a small plumbing company who vote red both making $1 million+ annually and neither wanting their own taxes to go up. Then there are the guys below them looking up. Over 10% of the country will be in the top 1% of earners at some point in their life. So the guys pulling in a few hundred K as a senior engineer or construction manager don’t want their taxes to go up either.
Okay. Then let’s also reduce what’s spent welfare/benefits by a similar amount, at least we’re not taking money they worked for.
The Peak Year (1944): The 94% rate applied to taxable income over $200,000 (which included a 3% regular tax and a 91% surtax). That $200,000 would be incomes over $3.8 Million today.
The High-Tax Era: Top marginal rates remained above 90% for two decades, spanning from 1944 through 1963.
This is supposedly the era that made America "great".
Aside from a brief blip during WWII, federal tax receipts as a percentage of GDP have been stable at around 17% of GDP, going back to 1950: https://fred.stlouisfed.org/series/FYFRGDA188S. Those high marginal rates never actually raised very much revenue. To close the deficit, we have to get that 17% number up to 23%.
To raise revenue, you need to lower the threshold at which high marginal rates kick in so that you actually capture the fat part of the tax base. About half of all income is earned by people making $100k-800k. That’s around where the heavy tax burden falls in every western european country.
Though most of them only for one year due to temporary revenue, so it's not that rational.
Technically it was Besset, but Trump gave him the reigns.
The purpose seems to be to radically debase the dollar and setup a crises that requires an entitlement cut (Social Security) for "the good of the economy" while also expanding military spending at the same time.
The problem is the debt purchased by the Fed during QE had extremely low yields (COVID era) the reserves held by banks created by the Fed during QE now cost more to service by the Fed.
The next few years would be fun.
- I absolutely agree that inflation has nothing at all to do with QE, people who claimed that are just idiots who have a gold fetish.
- the problem I'm talking about is the fact that central banks didn't use QE as an opportunity to erase the public debt it bought. At the time it wouldn't have been an issue in any way. But now because inflation is back (due to oil) central banks cannot buy government bonds when they reach maturity and have to raise rates. Then the government bonds have become very expensive, and it has to be paid to the private sector on the market, so whenever a US govt security reaches maturity, the budget constraint increases. Sterilization of the debt would have alleviated this issue a lot at no cost.
Also, we should have taken the lessons of the era and raise the inflation target to 4%[1] at that time (it was definitely politically achievable then, now not so much).
[1]: https://www.imf.org/en/publications/wp/issues/2016/12/31/the...
At a minimum, doing so would have created doubts about the future of the dollar. (Because countries that start having the central bank create money to fund the government often wind up in runaway inflation, with the currency becoming worthless.)
As to a 4% target: Given that they were stuck at 0% for the next decade (and tried, and failed, to get up to 2%), why would they move the target to 4%? They already couldn't do what they said, why double their failure?
That's a good point, but it's not as clear cut. The Fed is supposed to achieve the double goal of full employment and price stability and it's not forbidden to make money out of thin air for that purpose, that's the reason why QE is a thing at all. The exact legality of canceling US debt on its balance sheet isn't clear, but:
1. Before 2014 the Obama admin had the power to pass a law making that explicitly legal.
2. There are examples of theoretically valid instruments to achieve the same goal which have been discussed in the period (see the “1 trillion dollar coin”).
> At a minimum, doing so would have created doubts about the future of the dollar. (Because countries that start having the central bank create money to fund the government often wind up in runaway inflation, with the currency becoming worthless.)
Context matters: doing it now would send a disastrous signal, but back in the early 2010s the challenge was to drive inflation up, which is why the Fed used QE in the first place. If anything such a move could have made QE more efficient to achieve its goal (in addition to helping today's public finances, which I argue would have had a stabilizing effect over the long run).
> As to a 4% target: Given that they were stuck at 0% for the next decade (and tried, and failed, to get up to 2%), why would they move the target to 4%? They already couldn't do what they said, why double their failure?
The IMF paper I linked above is pretty clear about the goal of such a measure, but the idea is to have more leeway in case of crisis, because if your inflation is around 2%, your Fed target rate is around 2% as well and you can only lower it by 2% as a stimulus measure, whereas with a 4% baseline inflation rate you have twice the leverage in terms of target rate.
Re the "1 trillion dollar coin": I like your wording: "Theoretically valid". I don't like YOLOing theoretically valid moves in a crisis, only to find out a month later that the courts rule them invalid and you have to unwind them.
I agree, which is why I put “go through the legislative process to make that legal” above. Especially since there was no real emergency. (“in a crisis” though going YOLO may still be worth it though, because it may be enough to earn the time you need to go through the bottom of the crisis. And also if it's very unclear how legal/illegal this is, the fait accompli may be enough to convince the judges to side with your decision in order to put the country in too much of a trouble).
Both sides are to blame - neither will fix the problem. Obama could've made that his goal - he was competent, had a lot of political good will, and many people were frustrated at the bailout policy Bush did, but instead it was inflationary printing (quantitative easing), Obamacare and Cash 4 Clunkers (which the used car market still hasn't recovered from).
I never voted for him - I didn't view him as honest, nor did he seem to indicate that he liked America, but was rather just a good talker - but I think he could've been a great president given a less radicalizing agenda.
He was probably the best situated president in terms of timing to fix the debt problem, but instead it was a good time for divisive politics. By the time Obama finished, it became clear neither party actually cared about the fiscally conservative Ron Paul supporting voting block.
I happen to think the policy was a good idea, and voting to keep it in play was the best vote of John McCain's career ... but it was definitely both radical and divisive.
Now, much of the "mandate" has been stripped away, health care remains a mess, and access is far from affordable, but you can't really blame that one on Obama.
It seems quite ironic, given the frequent complaints about the inability of Congress to either govern effectively or fix health insurance (for many and various definitions of "fix"), that the ACA was so divisive. At least it got passed! Yet given the opportunity twice (2017-2019, 2025-2027), a politically viable alternative hasn't been offered up by opponents of the ACA, let alone being able to fully repeal it.
The thing is, the divisiveness comes from one side - conservatives who were and are determine to oppose literally everything.
— the one side after they fsck the country sideways, every goddamn time.
It's hard to accept the 'everyone is the same' in light of Trump's antics. Remind me again which presidents started wars of choice at the behest of Israel even when they were explicitly warned of the consequences?
Government interest payments, which are already high, will become higher after future bond sales. This will compound future budgetary problems and could eventually lead to cuts in entitlements. If so, expect crime and political instability (already a problem) to rise in the future. This will take a while, though.
Normally rates are increased to lower inflation by reducing the supply of money. Given the multiple concurrent problems with energy (Hormuz, Red Sea/Yanbu, Russia/Ukraine, possibly Libya as problems are starting there, China is buying aggressively) then higher rates may not be enough to stop inflation. This would create a situation where both borrowing is harder and inflation continues to rage. This is very bad and will lead to demand destruction (nobody’s buying anything because it’s too expensive and they can’t finance it anyway). This results in a severe recession at the minimum.
Edit: wow, I really set off a discussion with this. See replies below for clarification on mortgage rates, which is the least important part anyways. Also, I should note that a lot of the above is a worst case scenario, if energy isn’t solved soon and especially if bonds don’t respond to the hike, leading to further hikes.
This could be the catalyst to lower prices if sellers get spooked, especially if gas prices keep going up.
That's not to say that rising rates aren't a sign of bad things, the definitely are, it's just not going to make much of an impact with this magnitude of change.
It all depends on how long buyers (in aggregate) are willing to hold out, or if they are simply unable to buy at these prices. And nobody really knows that.
As a buyer you rather want to take out a loan in a high interest rate environment than a low interest rate environment, given that the monthly payment is the same.
1000 usd extra paid towards your mortgage actually makes a difference when the rate is 15% compared to when it is 1.5%
But a lot of people bought in 2024 expecting that to happen.
Higher interest rates mean the monthly payment is higher. You need to pay back the principal + the interest.
House prices tend to be "sticky", so that assumption is probably wrong. People who own a house often cannot afford to sell for the current value since it won't pay off their loan and leave enough money left over for a replacement house so they avoid moving. Eventually things get bad enough that they "sell short", but that takes a credit hit so you don't want to do that until the loss is large (and in turn you gain more).
But if you have a 25 year term on a loan for a $500,000
Approx numbers:
5%: $2922 monthly, total paid: $876,885
10%: $4543 monthly, total paid: $1,353,000.
Given a $1500 monthly payment and a 30 year loan (30 year is most common in the US), at 5% loan is $279,400; at 10% the loan is for 170,900.
If you expect rates to come down soon, you can plan to refinance in the future, but that’s a gamble. Rates may not go down, or the value of the house could go down before you refinance, which may make refinancing more expensive depending on how much you owe.
Paying down a high interest mortgage will always have bigger impact on the dollar than paying down a low interest mortgage.
I’m comparing a mortgage with a high rate and lower principal to one with a lower rate and high principal, where the minimum monthly payments are the same and the owner pays the minimum.
A high interest mortgage just means that you pay more total interest over the life of the mortgage. In any case traditional mortgages are front-loaded, so you pay more towards interest up front than you do principal.
An optional extra payment is worth more when interest rates are higher.
Ie. An optional extra payment of 1000$ will pay your 150$ a year in saved interest when the rate is 15% and only 15$ when the rate is 1.5%.
Everything else being equal, optional payments has a higher value, which represent value to the buyer.
Note that the US mostly does fixed rate for life of the loan. Many countries only have ARM (adjustable rates), and those exist in the US as well. If you have an ARM that changes things greatly.
This rate hike is aimed to stabilize the bond yields which in turn will lower the mortgage rates.
If interest rates go up, bonds get sold (for better yield bearing products), pushing the yields of those bonds higher. And it finds some equilibrium. The fact it isn't immediate has to do with short term vs long term bonds. When they mature and the pace of arbitrage.
I don't see how a rate hike is meant to lower mortgage rate. And just looking at the figures shows it's the opposite effect.
Logically, if borrowing money becomes more expensive, how could borrowing specifically for the purpose of buying houses become cheaper.
The fed rate provides a floor for mortgage rates, but the 10 year yield and mortgage demand decide the ceiling. Currently the demand is pretty low, and therefore the yield mostly controls the mortgage rates.
This is logical and empirically observed.
But you are right on the longer term effect. Zooming out: Fed hikes → inflation cools → inflation expectations fall → yields fall → mortgage rates fall.
But the latter is not guaranteed, and it takes time.
I'm unsure to understand how the ceiling and floor mechanisms work. But will dig into that. Thanks.
This part isn’t true. It can happen, but not always, especially right now.
This is highly inaccurate. The 10 year US treasury is a better metric for predicting mortgage rates. We saw this during the past interest rate cuts, interest for loans and mortgages still went up, remember? I do, because I was borrowing at the time. And why was that? Because the 10-year treasury continued going up, and that matters more than short term interest rates. The 10-year treasury is about expectations about the future, so we need to look at how the market responds before screaming mortgage rates will go up, they could actually go down.
The 10 year and fed rates are usually correlated. Occasionally rates spike or dip without moving the 10 year, but these events are brief. This could be a short spike, but only time will tell.
You may notice a few key similarities now with oil embargoes, reduced hiring, an extremely expensive war, and rapidly expanding government debt as a result of that war. If you want a qualitative feeling about people's moods in the 70s, you can watch such movies as:
Taxi Driver The Deer Hunter The Warriors Americathon Network
Counterintuitively the rate hike can help lower things like mortgage rates by stabilizing the bond yields.
The wars already put us into too much debt, Obama continued it for 8 years (granted, the deficit slowly went down, but it wasn't fixed). Trump and Biden did a huge disservice to the debt (but neither really cared much about it), and now I fear the path Bush, Obama, Trump, and Biden have laid will not be easily fixed.
Having said that, you are depressingly very correct. A negative population growth will cause the post-2008 depression to continue even longer, and probably more agressively.
[0] https://data.worldbank.org/indicator/NY.GDP.PCAP.KD.ZG?end=2...
I don't think that mortgage rates are going to go down; I think they will go up. Just my opinion.
I also think oil is about to go up even more, maybe for multiple years, which is going to be inflationary on everything we do. But, could be really good for solar growth, electrification, and electric cars.
https://www.washingtonpost.com/business/2026/09/16/heres-wha...
I'll be you; they are higher this time.
It’s a highly non-linear system, many moving parts, people and systems adapt.
It's tough to make predictions, especially about the future!