Thread

Fed hikes rates as inflation worries push up bond yields

184 points · 250 comments · wslh

bwb · 1789586180 · focus · HN ↗
Get ready for a fun ride my friends :)
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.
1. leptons · 1789586770 · focus · HN ↗
  This comment isn't helpful. Please explain for those of us without a degree in economics.
  1. kadoban · 1789587248 · focus · HN ↗
    Inflation is high, so interest rates need to go up to try to slow that, but the economy isn't doing amazing already, and higher interest rates won't help that.
    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.
    ihsw · 1789588023 · focus · HN ↗
    [dead]
    rayiner · 1789588137 · focus · HN ↗
    > 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: <a href="https://usafacts.org/answers/how-much-debt-does-the-us-have/country/united-states/" rel="nofollow">https://usafacts.org/answers/how-much-debt-does-the-us-have/...
    nemomarx · 1789589182 · focus · HN ↗
    You really really just need to raise taxes. Just find a way to sell that to the public (focus on the rich or large corporations or whatever outgroup you want basically)
    apparent · 1789589431 · focus · HN ↗
    Disagree. We have a spending problem, not a tax revenue problem. No matter how much the govt brings in, it will want to spend an increasing amount more.
    ifyoubuildit · 1789590509 · focus · HN ↗
    Is there anything that can't be solved by bigger government?
    rayiner · 1789597588 · focus · HN ↗
    Our budget deficit is $2 trillion. To close it, you need to significantly raise taxes on the fattest part of the income curve, which is the top 25%. They have $10 trillion of income. <a href="https://taxfoundation.org/data/all/federal/latest-federal-income-tax-data-2025/" rel="nofollow">https://taxfoundation.org/data/all/federal/latest-federal-in.... An across the board 200 basis point increase would close the deficit. That would raise their taxes to 38% at the low end to 46% at the high end, which is perfectly fine.
    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.
    what · 1789608197 · focus · HN ↗
    > taking half of someone’s money is totally fine
    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.
    rayiner · 1789613133 · focus · HN ↗
    No, U.S. benefits are at a typical level for an OECD country. The problem is the taxes. U.S. taxation is only 25% of GDP, versus 40% in western Europe. We could raise taxes $3 trillion annually and still be at the level of one of the more responsible European countries like the U.K.
    leptons · 1789627354 · focus · HN ↗
    The wealthy have been taxed appropriately in the past, we just need to do it again. There is precedent.
    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".
    rayiner · 1789643160 · focus · HN ↗
    Okay, but how much tax revenue was raised from those high marginal rates? The top rate is meaningless without knowing how much money that actually brings in for the government. That’s the key part of the analysis for purposes of this discussion.
    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: <a href="https://fred.stlouisfed.org/series/FYFRGDA188S" rel="nofollow">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.
    cbolton · 1789637957 · focus · HN ↗
    > Over 10% of the country will be in the top 1% of earners at some point in their life
    Though most of them only for one year due to temporary revenue, so it's not that rational.
    rayiner · 1789650999 · focus · HN ↗
    At peak career ages, the 75th percentile household income is almost $200k and the 90th percentile is almost $300k. That’s exactly the range you need to tax. Across all ages, households earning between $150k and $800k earn half of all income—$7 trillion.
    pixl97 · 1789588298 · focus · HN ↗
    Yay stagflation!
    hdgvhicv · 1789588446 · focus · HN ↗
    It’s worse than no ability to fix it — he caused a large part of it for unclear reasons
    base698 · 1789589265 · focus · HN ↗
    Covid? Half the money printed happened under his watch the first admin. Biden continued the other half. Now we have yet another war to make matters worse. What are you proposing be done to fix it?
    c0nducktr · 1789589640 · focus · HN ↗
    Well I sure wouldn't have started another war.
    Supermancho · 1789589474 · focus · HN ↗
    > he caused a large part of it for unclear reasons
    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.
    almost_usual · 1789588691 · focus · HN ↗
    Long term bond yields are not directly tied to the Fed funds rate.
    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.
    gloryjulio · 1789589079 · focus · HN ↗
    There is also insane amount of debt from ai related investment. China's free model is crushing the ai margins while these companies need to pay their debt and obligations. The debt bomb clock is ticking.
    The next few years would be fun.
    stymaar · 1789589210 · focus · HN ↗
    QE without public debt sterilization is going to appear as the costliest macroeconomic mistake of the early 21st century.
    AnimalMuppet · 1789593793 · focus · HN ↗
    Disagree, fairly strongly. In 2008, four trillion dollars evaporated. In order to keep the economy from completely crashing, the Fed created $4T using QE and such tricks. The result was 15 years of flat. No inflation for 15 years. If inflation shows up a decade and a half later, that probably wasn't the fault of how QE was done.
    stymaar · 1789624526 · focus · HN ↗
    You're getting my point wrong:
    - 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]: <a href="https://www.imf.org/en/publications/wp/issues/2016/12/31/the-case-for-a-long-run-inflation-target-of-four-percent-41625" rel="nofollow">https://www.imf.org/en/publications/wp/issues/2016/12/31/the...
    AnimalMuppet · 1789648257 · focus · HN ↗
    I see. Well, what you propose might have the minor problem of being illegal for the Fed to do. I'm not perfectly sure (and I don't want to take the time to research this rabbit hole right now), but the Fed is deliberately different from the Treasury. It's not supposed to fund the government by creating money.
    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?
    stymaar · 1789666905 · focus · HN ↗
    > see. Well, what you propose might have the minor problem of being illegal for the Fed to do. I'm not perfectly sure (and I don't want to take the time to research this rabbit hole right now), but the Fed is deliberately different from the Treasury. It's not supposed to fund the government by creating money.
    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.
    AnimalMuppet · 1789669662 · focus · HN ↗
    Re 4%: And, as we saw in 2008 and after, being stuck against 0% with no room to move is a really uncomfortable place to be.
    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.
    stymaar · 1789671355 · focus · HN ↗
    > I don't like YOLOing theoretically valid moves […], 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).
    ThunderSizzle · 1789589472 · focus · HN ↗
    The country has been _run_ by fools for 26 years. Congress has had 26 years to do something about the fiscal situation, and we've had four presidents, and the fiscal responsible side of the electorate is never listened to.
    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.
    hsbalanxvxjsmab · 1789591261 · focus · HN ↗
    I would love to hear what was "radical" or "divisive" about Obama's policy. A significant portion of the country disliking him because of his skin color doesn't make his policies "radical"
    aftbit · 1789595454 · focus · HN ↗
    A universal health care mandate were both radical and divisive, and the popular nickname for the ACA today is "Obamacare".
    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.
    doom2 · 1789605526 · focus · HN ↗
    > A universal health care mandate were both radical and divisive
    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.
    hsbalanxvxjsmab · 1789612243 · focus · HN ↗
    Lol cool so health care is your definition of "radical" and "decisive". Hint: it's neither of these things and the only reason it was considered as such was because Obama was black (see tan suit). Seems like we need a few more years of woke cause you still can't see the obvious
    watwut · 1789631811 · focus · HN ↗
    It was not radical and he adopted originally republican ideas. They even originally backed it.
    The thing is, the divisiveness comes from one side - conservatives who were and are determine to oppose literally everything.
    AnimalMuppet · 1789593516 · focus · HN ↗
    Why specifically 26 years? I agree that Congress has been increasingly useless, leading to more and more rule by presidential decree in order to have a government that runs at all, but there wasn't a step function 26 years ago.
    program_whiz · 1789594480 · focus · HN ↗
    its because prior to that (2000 Bush era), congress and president had a plan to payoff debt and had a balanced budget plan in place to avoid over spending.
    bothers · 1789610749 · focus · HN ↗
    > Both sides are to blame
    — the one side after they fsck the country sideways, every goddamn time.
    khriss · 1789633196 · focus · HN ↗
    > The country has been _run_ by fools for 26 years.
    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?

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