The Fed May Discuss the Biggest Interest Rate Increase Since 1994 - Slashdot

Posted by msmash

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  You don't fight inflation with interest, you cause inflation with interest.

  • by serafean ( 4896143 ) on Tuesday June 14, 2022 @05:06AM (#62617446)

    Yes, you cause inflation with low interest.

    assuming inflation is caused by too much demand for not enough available goods, with interest you perform demand destruction, which could curb inflation. The tricky part is to not cause a recession in the process.
    Poor people will get destroyed either way...

    But hey, I'm just another armchair economist. Open to knowing how interest hikes cause inflation, if you care to explain.

    • Re:

      You know what really causes inflation? M0. You can manipulate the economy in the short term with monetary policy but in the long run if you don't get fiscal, you become Zimbabwe. At this point it would take a miracle of fiscal discipline to avoid this fate.

      • Re:

        Some would argue it's too late for that. US debt is giganormous. US should increase interest rates, but by doing that, they increase the value of their debt. Coupled with the recession, it will become unsustainable and it seems like there might be only two realistic options:
        1. Default
        2. Print even more money and let inflation roll again

        Which one seems more likely?

        • Re:

          The latter. The mega-corp banks which compose the US's central bank just need to do some posturing before they create money out of nothing, thereby devaluing the little man's holdings, and enriching themselves so they can gobble up the last 1% or so of the world's wealth they don't own.

        • Re:

          Well, cutting spending so that the debt can be paid down would also do the trick. We can expect some serious budget battles over the next couple of years.

          • Re: Absurd

            Expect bipartisan military budget increases. The only escape from stagflation that the current political class sees is war with China. Of course, the average citizen would prefer a return to manufacturing dominance, but the Capitalist class would prefer war.

        • Re:

          No, the value of all current debt would stay the same as it's already been borrowed so interest rates dont effect it. Future debt will be borrowed at this higher interest rate but given how significantly low interest rates are now I doubt even a big boost from the fed would push it above its historically normal range.

          Furthermore, with the high inflation going right now our debt is actually shrinking in terms of relative value as the money we'll be paying the debt off with will be worth less than when we bor

      • Goodhart's Law

        Whilst the overall quantity of money is important, focusing on a single measure to explain inflation consistently doesn't work, as demonstrated by the work of Charles Goodhart

        https://en.wikipedia.org/wiki/... [wikipedia.org]

    • Re:

      Cheap money is only one of the factors. Broken supply chains is the other. You cannot "curb demand" for basics like food and shelter. This will lead to social unrest. If regulations and foreign policies are restricting energy and food production, raising interest rates will lead to stagflation. Rising interest rates will cool the economy but the government will still need to print money to subsidize basic food and services. Excessive covid restrictions, foreign policy failures, unrealistic domestic policy g

      • Re:

        "unchecked immigration" No. Immigration is curtailed and what immigration there is depresses inflation by decreasing wage rates at the bottom of the scale.

        "Rising interest rates will cool the economy but the government will still need to print money to subsidize basic food and services."

        No. The budget deficit is caused by many things, subsidizing food and services is not one of them.

        "If regulations and foreign policies are restricting energy and food production"

        That's a big if. The U.S. is already self-suff

    • Re:

      Biden runs the country, Too Big To Fail runs the banks, and Woke Politics runs Congress.

      Be careful what you ask for. You just might get a nonsensical bullshit "solution" that your leaders are actually going with.

      • Re:

        Woke living rent free in your head. Why is it only boomers and Fox use that word?

  • Re: Absurd

    only temporarily as people rush to buy before rates skyrocket. After that the demand destruction kicks in and prices cannot keep rising or demand disappears. Saving is encouraged instead of borrowing

    • Re:

      I will get some anger for this, I am sure, but I feel this is actually a good thing, that older generations simply detest.

      Specifically, there is a savings crisis in younger american portfolios, because of multiple decades of poor wage increases and low interest rates, making saving unrealistic.

      A sharp increase in federal rates will eventually manifest as higher rates for consumer interest rates also (such as the payouts of savings accounts, CDs, and other bank investments). It will mean the fatcats in walls

  • Re:

    Supply and demand. Cheap borrowing increases money supply, which makes it worth less (more money competes for the same goods, so you have to pay more to buy goods). Raising interest rates literally makes money more expensive, which is the opposite of inflation.

  • Re:

    So higher interest, i.e. expensive borrowing and hence expensive money, drives inflation?

    You might want to explain that, because logic would say that if everyone can get more money cheaply, and hence everyone is able and probably willing to pay higher prices, inflation would go up.

    • Re:

      inflation would go up.

      Inflation is an effect of the money supply increasing without a corresponding increase in the supply of stuff to buy with money.

      Or a decrease in the supply of stuff to buy with money without a decrease in the money supply.

      Same thing, really - more money chasing fewer things.

      Printing $2.2T without an increase in the supply of goods is a perfect example of inflation in action.

      But we all know that a Democrat President couldn't possibly cause inflation, so it must be a cabal of banker

  • Re:

    This is really not true, if the central bank charges interest when it lends out money it created out of nothing to banks, it will actually suck money out of the system and therefore push the economy towards deflation. When the money supply is inflated, like it is now with 10+ years of stimulus behind us, it's very easy for prices to start going up at any sign of a shock. There is unspent money around and we are now seeing this inflation of the money supply finally spil into the real world economy and not ju

• Print money at a record-breaking pace, then act surprised at the consequences. Who could have expected this?/s

  Inflation is actually far higher than the government admits. Visit ShadowStats for a more realistic view.

  • 1 hidden comment

  • Re:

    Ah yes what a deal. Only $175 for opinions on a 1990s style website.

    • Re:

      Wow, you weren't kidding... yikes!

  • Re:

    Right, the inflation has nothing to do with runaway commodity prices caused by the war and covid. It has everything to do with old and tired conservative scare mongering that I've been hearing for the last two decades and has never materialized.

    Gimme a break...

• Per https://tradingeconomics.com/u... [tradingeconomics.com] , raising the interest rate by 0.75% will still not increase it to what it was even in early 2019. You don't stop the worst inflation in 40+ years by rolling back the clock on the interest rate by 2 years.

  For most of the early 1980's the interest rate was greater than 10%. That's what we need the interest rate to be if we want to stomp out inflation. Sure, raising it by 10% in one fell swoop will prob crash the economy. Unemployment will go up but prices will go down as

  • Re:

    IMO, monetary stability is the best path forward. If markets believe that the value of the dollar is likely to remain stable, give or take, then they can plan and make rational economic decisions. High and especially unpredictible interest rates mean they can't, and they will not make the investments today that will keep people gainfully employed for the coming years and decades.

    But I do understand the problem with the higher interest rates that will needed in order to achieve this. I lived through the p

    • Re:

      1st paragraph should read in part "High and especially unpredictable inflation rates mean they can't..."

      High and especially unpredictable interest rates do the same, but to a lesser and more temporary extent, as explained in subsequent paragraphs.

    • Re:

      That's the catch. I read somewhere that each 1% rise in interest rate costs the USG in debt servicing costs about the same amount as an entire additional US Navy. It was easier to raise interest rates in the 80s because debt to GDP was a fraction of what it was today.

      https://fred.stlouisfed.org/se... [stlouisfed.org]

      • Re:

        And that was part of why a lot of us warned that the subsequent growth of the federal debt was unsustainable, and could lead to one or more of: (a) default; (b) hyperinflation; and/or (c) Soviet-style collapse, with federal power essentially gone, and most if not all of the traditional functions of government reverting to the states, some of which would then likely fail as well. Any of these could also lead to civil war. These are all very large sparks, and I don't think it would take much more than a ver

  • Re:

    They're probably doing it too slowly too late. But exactly that - jumping several percentage points will create panic across whole industries. Large businesses could suddenly find just the cost of debt makes them insolvent. But the lights have to come to full brightness and the cockroaches need to start running.

• The Feds really should have raised the interest rates during Obamas' last year. At the very least they should have taken the opportunity to offload the massive save they did during the housing bubble of 2007. Yes, it could have been far worse, globally. It was still a good opportunity for the first two years of Trump's term.

  But nope, they wanted a really good recovery; show the world that the US can still pull off the early 2000s. The economy knew the low rates were unhealthy and gone on too long. But the economy was addicted to. Congress nor the Feds ever really addressed this addiction. Companies were and kept getting deeper debt leveraged due to the low interest rates. Now those companies (many "Too big to fail") don't know how to service a "monthly minimum due" increase.

  And when the rise started to peak, the Trump administration politizied the Feds. We had morons who couldn't add 2+2 talking about how rates should remain low and keep the economy "healthy". Just ignore the majority of economists and 100 years of economic models. Thankfully, our cousins in the EU been messing around with negative interest rates since Obama's time and the US had already decided it would be pretty bad for our economy to remove the "zero" rate rallying point.

  Now, 7 years behind schedule, we are taking drastic measures to keep atleast one foot on a really fine line. I think we will be fine, but I am sure everyone is expecting a few backruptcies and atleast a quarter of recession. These would be major achievements for Mr Powell if that is all we face. I am just glad Congress was mature enough and didn't politicize the nomination.

  I think the economy should expect leaping interest rates as Powell was never keen on near-zero rates. He isn't an economist which we normally consider a negative, but being one didn't prevent this mess. Unfortunately, he will probably get fired at the end. Until Trump, low rates were soley a Democrat thing and Republicans generally want higher rates. So after the next election, I don't see either side being nice to Mr Powell for what he did.

  • Thank you. Came here to same, minus the last paragraph. Republicans always want low rates because that covers up their out of control spending and helps the 1%.

    But yes, rates should have been raised years ago. Keeping interest at effectively 0% was ludicrous to begin with. No sane nation (I'm looking at you, Japan) should ever get down to that level. Once you're there there's no wiggle room. You can't go negative because that causes a whole host of other issues.

    Right now we should be at 2.5%. High enough to cool things down, but low enough that borrowing isn't prohibitively expensive.

    • Re:

      While Republicans haven't exactly CUT spending in a long time, their "out of control spending" is nothing compared to what Biden wants. You're really not that good at math.

      Unless you think QE was all an evil Republican plot, which it wasn't.

    • Re:

      They did effectively go "lower than zero" by quantitative easing (buying bonds). They had actually stopped that and started quantitative tightening (selling bonds) before the pandemic, and then they reversed course and went back to quantitative easing at a faster rate during the pandemic. Now they've leveled off, and if you think rising interest rates are bad, just wait until later this year when they start selling off those bonds again. Money is going to become a lot more expensive to borrow, and that's

      • Re:

        I hope so, because housing speculation is dominated by corporations which are fucking us by driving up costs, and few are more deserving of losing their shirt.

    • Re:

      For me the old Republicans were quite different from the Tea Party era onward; think pre-2000s. Both parties have a general idea that rates shouldn't be too low. Neither wants inflation to run rampant but both want some inflation... how much is where they differ. To severely oversimplify, Dems want more cash circulating, Repubs want more IOUs running around. Neither is a bad position if it doesn't tip into their bad areas. And bad areas is all that the media talk about and cause fear of.

      Dems really wan

    • Re:

      I'm pretty sure that $1.9 trillion "America Rescue Plan" spending didn't help with inflation.

  • Re:

    I think at this point rate hikes don't matter. Actually I'd go further and suggest that rate hikes will do more harm than good at this point. I agree we should have raised rates and run off the balance sheet much earlier. However the FED did not do that. They kept rates low and the left the balance sheet expansion of the 2008-2012 years remain. As a tool the FED rate is broken.

    What I think would help most is if they just left rates a lone. The healthiest of the market makers could continue to access thos

    • Re:

      I generally agree with your post. It is more or less what Mr Bernanke & Mrs Yellen enspoused. The only deviation was that the Fed should use the rate as a buffer to mellow out the spikes and valleys of the economy. This is the general consensus of economists. Mr Powell isn't one and I think he feels the rate is the only real buffer the Feds should use. Printing money, quantitative easing, buying specific market securities, etc aren't his thing. This severely restricts the Feds but that may not be

  • The outcome proves the Fed got it right

    Suggesting they should have increased interest rates when, after they didn't, inflation remained subdued proves there was no justification for doing so.

    https://www.usinflationcalcula... [usinflatio...ulator.com]

• • Re:

    So with inflation at 9% you're advocating for 13% Fed rate? That would detonate the balance sheet of... too many companies to count.
• You curb inflation by tightening the money supply. Raising interest rates to fight inflation is just theft (extracting more interest) on theft (debasing the currency).

  • Re:

    It's theft to lenders but a credit to borrowers who theoretically have an easier time paying back their loans.
• I don't envy the Fed's position even though I blame them for it. If you look at at the historical fed funds rate chart [stlouisfed.org] you'll see a 40 year history of lower highs and lower lows with the interest rate. Each time they chose to juice the economy rather than let market forces clean out dead wood. Eventually you hit zero.
  
  The problem now is housing is sky high and raising interest rates is likely to pop that bubble in a nasty way. Oops, now you've got a housing crash. With no cheap money to roll over debt all the zombie corps are caught with their pants down. We could see commercial entities start to go bang in rapid succession like a pot full of popcorn.
  
  Now you've got the shit hitting the fan while Fed funds rate are still less than 1% in a 9% inflation environment. What the fork are you supposed to do then? If unemployment starts to climb while the economy craters and inflation remains stubbornly high, well, you've kicked the can as far as it will go. If you reverse course and start handing out money again you'll only aggravate inflation.
  
  Part of me wonders if this isn't a deliberate attempt at a controlled demolition of the massive debt load out there. We suffer through 3-5 years of 10-15% inflation and then voila, debt-to-GDP is back to a manageable 60%.
• Rates work when your own economy is the one driving the inflation. Since the US gave up manufacturing, the inflation we're seeing is a result of changes occurring outside the US economy. We're in a stagflation trap; all that mashing rates will do is make everyone poorer, especially the poor.