Thread

Fed hikes rates as inflation worries push up bond yields

184 points · 250 comments · wslh

dabinat · 1789588567 · focus · HN ↗
Prediction: this causes a recession in two years, right after a Democrat wins the White House, who will be blamed for it. The economy will turn around after a few years, just in time for a Republican to win and claim they fixed it.
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.
1. carefree-bob · 1789594347 · focus · HN ↗
  A 0.25% rate hike is going to cause a recession? How, exactly, would that happen?
  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.
  1. aftbit · 1789594769 · focus · HN ↗
    I dunno about the politics, but personally I don't think there is a generic "correct" value. The rate describes the state of the world, and the "correct" value is whatever accurately describes the state of the world.
    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.
    unified101 · 1789597375 · focus · HN ↗
    I personally don't think there's a correct concept of money. Money describes how happy I feel, and the correct money I should have is whatever describes my current mood.
    So what can we collective do with money so I feel most happy. This may be the most important question of all to ask.
    pjc50 · 1789637357 · focus · HN ↗
    ^ This is unironically how the median voter responds to all this policy.
  2. quickthrowman · 1789594793 · focus · HN ↗
    > A 0.25% rate hike is going to cause a recession? How, exactly, would that happen?
    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: <a href="https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html" rel="nofollow">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.
    carefree-bob · 1789596238 · focus · HN ↗
    Yes, I think 5% will eventually happen, but I don't think we'll get there before the mid-terms, the Fed moves slowly.
    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.
    smackeyacky · 1789596316 · focus · HN ↗
    I don’t understand why central banks seem to use such a blunt object like interest rates for every inflation problem. It would make sense to rise if the cause of inflation was accelerated economic activity, not price rises due to supply restrictions. How does hurting mortgage holders even more help with not starting wars? All it can do is have a double dampening effect on the economy as people pull back their discretionary spending.
    Using interest rates for this kind of inflation is guaranteed to cause a recession.
    carefree-bob · 1789596736 · focus · HN ↗
    Central banks didn't use to do this, in the post-war period up until about 1980, they tried targeting the monetary aggregates like M2.
    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?
    smackeyacky · 1789597730 · focus · HN ↗
    I don’t think we have a wide enough Overton window when it comes to economic discussions, the neoliberal revolution of the 1970s killed a lot of little levers of economic control in most post social democratic countries. Instead we were promised a new age of free trade and economic liberalism and one single, shiny lever to control the speed of the economy like the governor on a steam train.
    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.
    rich_sasha · 1789613488 · focus · HN ↗
    It’s not entirely true. There’s plenty more levers on economy and inflation. This is the main one that central banks have.
    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.
    pjc50 · 1789638271 · focus · HN ↗
    Bob is correct here. The other tool people keep forgetting about is fiscal policy; government deficit spending is inflationary, and the US is currently running a very large deficit and was floating even more inflationary ideas like directly bribing voters to vote Republican in the midterms.
    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.
    fireflash38 · 1789644395 · focus · HN ↗
    He's right about interest rates. But he's missing the point behind the debate: whose policy choices got us to where we are today where this is necessary? Republicans.
    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.
    what · 1789598232 · focus · HN ↗
    > hurting mortgage holders
    How does raising rates hurt mortgage holders? They locked in their interest rate when they got the mortgage?
    metajack · 1789601012 · focus · HN ↗
    Not all mortgages are fixed rate.
    carefree-bob · 1789601534 · focus · HN ↗
    95% of mortgages are fixed rate in the US. And even that number is too low, most of the ARMs are taken out by businesses, not households.
    HWR_14 · 1789618204 · focus · HN ↗
    It's not good for the economy when no one is willing to move for the next 20-30 years. And it's not good for the people who are unable to move to chase a better job as well.
  3. ProfessorLayton · 1789595121 · focus · HN ↗
    >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.
    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.
    carefree-bob · 1789596038 · focus · HN ↗
    Did you ever think that the reason why US debt is so high is because rates are so low and borrowing is so cheap? Higher rates are needed, and are really the only mechanism to reduce borrowing.
    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.
    ProfessorLayton · 1789596609 · focus · HN ↗
    I agree with you, and this is much better than your previous "canned response". However, this goes back to my earlier point that even historically low rates can cause economic chaos if the debt is high enough.
  4. snapplebobapple · 1789604009 · focus · HN ↗
    At this point its probably more like 12% temporarily because the more correct way to measure it is to take the 1980s inflation measure (from before all the medelling to make it artificially lower) and raise rates by 25 bips every quarter until that number is zero, then back it off slowly
  5. esalman · 1789611868 · focus · HN ↗
    I don't think numbers matter here.
    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.
    carefree-bob · 1789612233 · focus · HN ↗
    The dollar is not "backed" by a military. China has a huge military and no one uses the Yuan for third party trade. Why not? Because China does not run trade deficits that allow third parties to acquire the Yuan in the first place, it does not have open capital markets that allow third parties to store their surpluses in Yuan, and it does not have the investor protections that give investors confidence that they can pull their savings out whenever they want.
    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.
    esalman · 1789613011 · focus · HN ↗
    Your points are valid. But there's a reason why dollar is "petrodollar" - when we say it's backed by US military it's really the axis of US-Israel-Saudi Arabia which control military as well as resources. People use US dollar not necessarily because they want, but because they have to. I also do not know who Graber is but I'll look it up.
    dpc050505 · 1789652289 · focus · HN ↗
    The petrodollar system resolved the 70s inflation crisis after Nixon sent the head of the CIA to Saudi Arabia. The US military backed revolutionaries during the arab spring because the dead dictators wanted to start a pan-african currency with which to trade oil. Iran, Venezuela and Russia were under sanctions and treated as enemies in very big part because they were selling oil for other currencies than the USD.
    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.
    lenkite · 1789670457 · focus · HN ↗
    The dollar is most certainly backed by military of the Corporate States. This is eminently observable to the rest of the world, who tend to get "regime changed" when the talk comes about not using the USD.
    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.
  6. [deleted] · 1789631677 · focus · HN ↗
    [deleted]
  7. pjc50 · 1789637712 · focus · HN ↗
    > is to ask them what they think the correct value should be
    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.
  8. SideburnsOfDoom · 1789643809 · focus · HN ↗
    > A 0.25% rate hike is going to cause a 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".
  9. datsci_est_2015 · 1789645481 · focus · HN ↗
    Bring this energetic criticism onto Warsh, whose speech was nauseatingly political in comparison to his predecessor. Paraphrasing ~ “I’m not data-driven, I’m trend-driven”. Frankly speaking, he sounded like a dumbass who failed his way upwards into a position of meaningful power, much like the rest of the government at the moment. Warsh also refused to give a target or a forecast.
    The OP that you’re criticizing is simply making a prediction, and he doesn’t work at the fed.
    almog · 1789647407 · focus · HN ↗
    It was hard to watch and ended abruptly. Perhaps the only 2 reporters that kind of tried to challenge the contradictions in his approach were Nick Timiraos and Michael McKee.
    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.
  10. bryanlarsen · 1789653691 · focus · HN ↗
    A 0.25% rate hike might be the straw that breaks the camel's back. There are a lot of stressors on the economy right now. I don't think it's going to take too many more to tip it. And once it tips, it'll pop bubbles that'll magnify the recession significantly.
  11. stasomatic · 1789740808 · focus · HN ↗
    I think there is more of a physiological component to it on the consumer level. I don't care about the fed rate but I care when I see the price of milk and eggs go up each a couple of months. In 2020, a carton of eggs at Aldi's was $0.79. Now it is $4. My income didn't grow 4x, but I am bit thinner now. Never mind housing.

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