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.
    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).

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