Fed plans to raise rates as soon as March to cool inflation

[TheDeadFlagBlues]

Unless jaichind believes that the neutral rate of interest is at 4 or 5 percent and that the Federal Reserve needs a federal funds rate of anywhere from 8 to 15 percent to control inflation, there's no reason to think that this tightening cycle would "blow a hole in the federal budget". In fact, based on his previous posts, we should expect the interest rate of a treasury bill to be around 4% at the height of tightening and that this interest rate would fall in 1 or 2 years.

Obviously, he may want to believe that this is true. Perhaps he can have wet dreams about his bizarre delusion that aligns with his ideology. Unfortunately for him, nothing over the past year has contradicted the "secular stagnation" hypothesis of Larry Summers. As far as I can tell, there aren't many serious economists who believe this burst of inflation implies anything about a sudden end to persistently low interest rates. In the end, if interest rates of 2% are enough to bring growth in the US to a sudden stop, that implies the federal government can continue to comfortably run deficits.

[Southern Senator North Carolina Yankee]

Unless jaichind believes that the neutral rate of interest is at 4 or 5 percent and that the Federal Reserve needs a federal funds rate of anywhere from 8 to 15 percent to control inflation, there's no reason to think that this tightening cycle would "blow a hole in the federal budget". In fact, based on his previous posts, we should expect the interest rate of a treasury bill to be around 4% at the height of tightening and that this interest rate would fall in 1 or 2 years.

Obviously, he may want to believe that this is true. Perhaps he can have wet dreams about his bizarre delusion that aligns with his ideology. Unfortunately for him, nothing over the past year has contradicted the "secular stagnation" hypothesis of Larry Summers. As far as I can tell, there aren't many serious economists who believe this burst of inflation implies anything about a sudden end to persistently low interest rates. In the end, if interest rates of 2% are enough to bring growth in the US to a sudden stop, that implies the federal government can continue to comfortably run deficits.

I spend half my time arguing with socialists and half my time arguing with Libertarians.

The thing is we have been "comfortably running deficits" for a number of years and yet even after record amounts of infusions of cash and credit, assuming what you say is true, the economy can still only function on zero percent interest rates and super cheap gas, then clearly there is some substantial and inherent weakness in the US economy and much of it stems from debt fueled consumption, be it credit cards, auto loans, college loans, home equity, or yes gov't debt funded transfer payments.

I had hoped that massive infusion of spending on infrastructure would break us out of this paradigm.

[jaichind]

Unless jaichind believes that the neutral rate of interest is at 4 or 5 percent and that the Federal Reserve needs a federal funds rate of anywhere from 8 to 15 percent to control inflation, there's no reason to think that this tightening cycle would "blow a hole in the federal budget". In fact, based on his previous posts, we should expect the interest rate of a treasury bill to be around 4% at the height of tightening and that this interest rate would fall in 1 or 2 years.

Obviously, he may want to believe that this is true. Perhaps he can have wet dreams about his bizarre delusion that aligns with his ideology. Unfortunately for him, nothing over the past year has contradicted the "secular stagnation" hypothesis of Larry Summers. As far as I can tell, there aren't many serious economists who believe this burst of inflation implies anything about a sudden end to persistently low interest rates. In the end, if interest rates of 2% are enough to bring growth in the US to a sudden stop, that implies the federal government can continue to comfortably run deficits.

Sorry, I am not making my argument clear.  I am not saying that in the long run, the USA inflation rate would not come down to something like 2%-3% after a period of high-interest rates.  Demographic patterns would point to lower inflation in the long run.  Likewise in that new world, there is no reason why interest rates cannot be somewhat above inflation like pre-2008 historical patterns and not dramatically so.  In that world I agree there is no reason, assuming the USD is still the world reserve currency, why the USA federal deficit cannot be in the 2%-4% of GDP range.

What I am agreeing is the nature of that deficit will change.  After a period of high-interest rates to beat inflation in the 1980s the interest on the federal debt rose to around 3% of GDP in the 1990s and only went down to around 1%-1.5% of GDP in the era of artificially low-interest rates.  One would expect to see the same pattern emerge this time around.  But there is one big difference.  In the 1990s the federal debt was around 45% of GDP and now the federal debt is around 100% of GDP.  Given that in both eras the federal interest rate would need to be somewhat, but not dramatically so, above inflation the level of federal spending on interest would be expected to rise above the 3% of GDP reached in the 1990s.  So for the same 2%-4%, a federal deficit that we had in the 1990s the non-interest spending as a % of GDP will have to be a good deal lower than in the 1990s unless taxes goes up and most likely both. 

Ergo my argument is that taxes will need to go up and non-interest spending needs to go down one way or another, either through inflation or by budget balance normalization.

[Benjamin Frank]

Unless jaichind believes that the neutral rate of interest is at 4 or 5 percent and that the Federal Reserve needs a federal funds rate of anywhere from 8 to 15 percent to control inflation, there's no reason to think that this tightening cycle would "blow a hole in the federal budget". In fact, based on his previous posts, we should expect the interest rate of a treasury bill to be around 4% at the height of tightening and that this interest rate would fall in 1 or 2 years.

Obviously, he may want to believe that this is true. Perhaps he can have wet dreams about his bizarre delusion that aligns with his ideology. Unfortunately for him, nothing over the past year has contradicted the "secular stagnation" hypothesis of Larry Summers. As far as I can tell, there aren't many serious economists who believe this burst of inflation implies anything about a sudden end to persistently low interest rates. In the end, if interest rates of 2% are enough to bring growth in the US to a sudden stop, that implies the federal government can continue to comfortably run deficits.

Sorry, I am not making my argument clear.  I am not saying that in the long run, the USA inflation rate would not come down to something like 2%-3% after a period of high-interest rates.  Demographic patterns would point to lower inflation in the long run.  Likewise in that new world, there is no reason why interest rates cannot be somewhat above inflation like pre-2008 historical patterns and not dramatically so.  In that world I agree there is no reason, assuming the USD is still the world reserve currency, why the USA federal deficit cannot be in the 2%-4% of GDP range.

What I am agreeing is the nature of that deficit will change.  After a period of high-interest rates to beat inflation in the 1980s the interest on the federal debt rose to around 3% of GDP in the 1990s and only went down to around 1%-1.5% of GDP in the era of artificially low-interest rates.  One would expect to see the same pattern emerge this time around.  But there is one big difference.  In the 1990s the federal debt was around 45% of GDP and now the federal debt is around 100% of GDP.  Given that in both eras the federal interest rate would need to be somewhat, but not dramatically so, above inflation the level of federal spending on interest would be expected to rise above the 3% of GDP reached in the 1990s.  So for the same 2%-4%, a federal deficit that we had in the 1990s the non-interest spending as a % of GDP will have to be a good deal lower than in the 1990s unless taxes goes up and most likely both. 

Ergo my argument is that taxes will need to go up and non-interest spending needs to go down one way or another, either through inflation or by budget balance normalization.

This is one reason why economics will always be a social science, there are too many unknowable factors.

I argue there is a second big difference, which is the need for the Federal Reserve to engage in 'quantitative tightening.'  Of course, it's not like the Federal Reserve needs to reduce its balance sheet all at once or even on any steady course.

In addition to this is obviously the uncertainty of geopolitical factors.  Is the west using the opportunity of Covid and the supply chain issues to break off most trade with China and its 'vassal states'? (Or decoupling.) Of course, it's largely private businesses that make these decisions, but, for instance, most Western nations have now dropped China's 5G, and, for another instance, Canada is considering not allowing Chinese state owned companies to buy Canadian rare earth mineral concerns/companies.

Some U.S companies are starting to buy rare earth minerals from Canada rather than from China.
https://globalnews.ca/news/8861965/rare-earth-mine-northwest-territories-canada/

So, starting to cut trade off from China (including keeping the Trump era tariffs) will also mean higher costs, but it may be the best decision from a geopolitical perspective. 

[jaichind]

https://thehill.com/policy/finance/3526315-mortgage-rates-hit-5-78-percent-in-record-spike/

"Mortgage rates hit 5.78 percent in record spike"

Excellent.  The rate rises are starting to have the intended effect.  There is much more to go.

[Beet]

https://thehill.com/policy/finance/3526315-mortgage-rates-hit-5-78-percent-in-record-spike/

"Mortgage rates hit 5.78 percent in record spike"

Excellent.  The rate rises are starting to have the intended effect.  There is much more to go.

The problem with inflation is that wages aren't going up as fast as prices, which hurts real wages. On the other hand, raising interest rates to increase borrowing costs and generate a recession also hurts real wages. Fiddling around with monetary policy doesn't really solve the problem. The issue as always is with the real economy.

As far as deficits, yes, the government can continue to comfortably run them, as demand for the dollar remains strong relative to other currencies.

[jaichind]

Powell Says Fed ‘Acutely Focused’ on Returning Inflation to 2%.   Good.  Please act with action.  Go get going and get it done. 

[jaichind]

Bloomberg had an article saying that the coming recession will be "Long, Moderate, and Painful".  It will be Long because it will take time to remove the inflationary pressure so tight money will be around for a while.  One risk of course is the coming recession might be several mini-recessions based on stop-go if the Fed takes it foot of the brakes too early leading to another round of inflationary surges.

[Saint Milei]

Bloomberg had an article saying that the coming recession will be "Long, Moderate, and Painful".  It will be Long because it will take time to remove the inflationary pressure so tight money will be around for a while.  One risk of course is the coming recession might be several mini-recessions based on stop-go if the Fed takes it foot of the brakes too early leading to another round of inflationary surges.

"moderate"

Lol they wont raise rates to the level they should be

[jaichind]

To be fair the Biden "team transition" response would be that in 2021 there was a one-time surge in prices and without the Russia-Ukraine war the inflation in 2022 was going to dive back downward.  I do not agree with them but their narrative does not contradict the data.

[Frodo]

Do you all think it is time current Federal Reserve Chairman Jerome Powell should take Paul Volcker's approach in taming inflation for good, even if it means we suffer a sharp, deep recession in the short-term? 

[jaichind]

Do you all think it is time current Federal Reserve Chairman Jerome Powell should take Paul Volcker's approach in taming inflation for good, even if it means we suffer a sharp, deep recession in the short-term? 

I think it comes down to how entrenched inflation expectations are in the economy relative to the Fed's judgment of such expectations.  As a result, the Fed could be overly aggressive or timid.  Of course, another central point here about raising rates and ending QE is that the issue of the high federal debt to GDP was not a factor in the 1980s.  This means higher rates will have a very significant impact on the level of interest payments going forward as a % of GDP.

The Chinese tried fiat current several times, namely in the Sung, Yuan, and Ming dynasties.  Each one lasted around 100 years before it blew up (the Yuan episode was more around 50 years.)  The Ming fiat currency episode was so bad that the Ching dynasty never even bother trying and stuck to the silver standard. The Fed was created in 1914 so the USA fiat currency scheme running into trouble is right on schedule (although one can argue the end of Bretton Woods in 1973 is the real start of USA fiat currency.)

The USA of course is in a much stronger position than the Chinese dynasties of old.  But to get out of the current fix the voters will have to accept that the spending over the last 20+ years was never paid for (including the Iraq and Afgan war fiascos) and now they will have to accept lower social welfare and military spending in excess to fund the interest payments on those unfunded spending.  And yes that also means no more free money for Ukraine or NATO and various other foreign policy boondoggles.  If the USA voters can come to terms with this the current fix can be resolved.  If not then we will have more start-stop inflation surges and economic stagnation as the Fed continues to try to monetize the debt that continues to rise and make the fix that much more painful when it does have to come.

[TheDeadFlagBlues]

More bizarre and misinformed points from jaichind:
1. The federal government faces borrowing costs that are unprecedented....over the past four years. In 2018, nominal interest rates on 10-year treasuries were similar. Of course, the real interest rate of a 10 year treasury note is negative at the moment. It's unclear how jaichind can motivate his claims about interest rates today having an impact on the level of interest payments going forward in light of this. If markets are tanking in response to rate hikes that are projected to bring the federal funds rate to their maximum in 2018, give or take a few 0.5 percentage points, this something about the neutral rate of interest as well.
2. Bluntly, his last paragraph is masturbatory. However much he might wish for there to be a fiscal reckoning, however much he might wish for Russia to defeat Ukraine, none of this is necessary. Zero justification is provided for his fantastical claims.

Here's my prediction: I think it's far more likely that the US experiences a deflationary episode by late 2023 than for the US to suffer another year where the headline rate of inflation exceeds 4 percent. In fact, my baseline prediction is that in 2023, the headline rate of inflation will be lower than 2 percent. The core rate of inflation will likely exceed 2 percent or something like this. To be clear, the transmission lag of monetary policy is very long - usual estimates are that it takes at least 4 quarters for the impact of rate hikes to be fully-felt. The best guess is that it takes ~8-9 quarters.

We're still in a regime of secular stagnation, where governments can basically run ponzi schemes. You may return to usual business in another year. Prices will be moderate, growth will be sluggish and economics will be boring again soon.

[Frodo]

Fed Moves Toward Another Big Rate Increase as Inflation Lingers
The Federal Reserve, determined to choke off rapid inflation before it becomes a permanent feature of the American economy, is steering toward another three-quarter-point interest rate increase later this month even as the economy shows early signs of slowing and recession fears mount.

[Saint Milei]

Do you all think it is time current Federal Reserve Chairman Jerome Powell should take Paul Volcker's approach in taming inflation for good, even if it means we suffer a sharp, deep recession in the short-term? 

The depression would be painful but necessary.

[Southern Reactionary Dem]

https://thehill.com/policy/finance/3526315-mortgage-rates-hit-5-78-percent-in-record-spike/

"Mortgage rates hit 5.78 percent in record spike"

Excellent.  The rate rises are starting to have the intended effect.  There is much more to go.

The problem with inflation is that wages aren't going up as fast as prices, which hurts real wages. On the other hand, raising interest rates to increase borrowing costs and generate a recession also hurts real wages. Fiddling around with monetary policy doesn't really solve the problem. The issue as always is with the real economy.

As far as deficits, yes, the government can continue to comfortably run them, as demand for the dollar remains strong relative to other currencies.

Wages almost never keep up in these situations but the issue of demand for the US dollar does worry me long term. Saudi Arabia is already weighing accepting Chinese Yuan for oil instead of dollars and the likes of Russia, China, Brazil, India and South Africa are teaming up to create a new alternate reserve currency backed by hard assets. Oil is the most important commodity and a lot of our allies depend in part on our adversaries that have oil. Our status as the world reserve currency is more in danger than people realize.

[Southern Reactionary Dem]

More bizarre and misinformed points from jaichind:
1. The federal government faces borrowing costs that are unprecedented....over the past four years. In 2018, nominal interest rates on 10-year treasuries were similar. Of course, the real interest rate of a 10 year treasury note is negative at the moment. It's unclear how jaichind can motivate his claims about interest rates today having an impact on the level of interest payments going forward in light of this. If markets are tanking in response to rate hikes that are projected to bring the federal funds rate to their maximum in 2018, give or take a few 0.5 percentage points, this something about the neutral rate of interest as well.
2. Bluntly, his last paragraph is masturbatory. However much he might wish for there to be a fiscal reckoning, however much he might wish for Russia to defeat Ukraine, none of this is necessary. Zero justification is provided for his fantastical claims.

Here's my prediction: I think it's far more likely that the US experiences a deflationary episode by late 2023 than for the US to suffer another year where the headline rate of inflation exceeds 4 percent. In fact, my baseline prediction is that in 2023, the headline rate of inflation will be lower than 2 percent. The core rate of inflation will likely exceed 2 percent or something like this. To be clear, the transmission lag of monetary policy is very long - usual estimates are that it takes at least 4 quarters for the impact of rate hikes to be fully-felt. The best guess is that it takes ~8-9 quarters.

We're still in a regime of secular stagnation, where governments can basically run ponzi schemes. You may return to usual business in another year. Prices will be moderate, growth will be sluggish and economics will be boring again soon.

What makes you think inflation will be under control by then? I can see interest rate hikes, even small ones, cooling off the asset/equity bubbles we've been seeing that were inflated largely by low-interest debt... but what I don't see is how commodities naturally resolve themselves. There too much at play outside of the fed's control. Worker productivity has been in decline for a few quarters now (maybe people leaving the workforce and fueling labor shortages?), widespread drought is killing crop yields, sanctions from the Ukraine war situation are driving up global oil prices, especially with diesel where North American sour crude isn't as amenable to refining low sulfur diesel, there's bird flu infecting chickens and the higher interest will likely also significantly slow private sector investment into increased output across the board. Not to mention, prices have gone up most among necessities like oil and food... understandably the last things most people cut from their budget as they are necessary for the activities such as being alive and commuting to work. To me this feels like a coming period of prolonged stagflation.

[jaichind]

More bizarre and misinformed points from jaichind:
1. The federal government faces borrowing costs that are unprecedented....over the past four years. In 2018, nominal interest rates on 10-year treasuries were similar. Of course, the real interest rate of a 10 year treasury note is negative at the moment. It's unclear how jaichind can motivate his claims about interest rates today having an impact on the level of interest payments going forward in light of this. If markets are tanking in response to rate hikes that are projected to bring the federal funds rate to their maximum in 2018, give or take a few 0.5 percentage points, this something about the neutral rate of interest as well.
2. Bluntly, his last paragraph is masturbatory. However much he might wish for there to be a fiscal reckoning, however much he might wish for Russia to defeat Ukraine, none of this is necessary. Zero justification is provided for his fantastical claims.

Here's my prediction: I think it's far more likely that the US experiences a deflationary episode by late 2023 than for the US to suffer another year where the headline rate of inflation exceeds 4 percent. In fact, my baseline prediction is that in 2023, the headline rate of inflation will be lower than 2 percent. The core rate of inflation will likely exceed 2 percent or something like this. To be clear, the transmission lag of monetary policy is very long - usual estimates are that it takes at least 4 quarters for the impact of rate hikes to be fully-felt. The best guess is that it takes ~8-9 quarters.

We're still in a regime of secular stagnation, where governments can basically run ponzi schemes. You may return to usual business in another year. Prices will be moderate, growth will be sluggish and economics will be boring again soon.

I think the core question is: After this set of interest rates increase cycle is done will real interest rates revert to historical levels (positive) or will we revert to the financial repression of 2008-2022.  If real interest rates do revert to positive levels then given the large debt to GDP ratio the interest costs will mean that primary spending will have to decline as a % of GDP.  If financial repression comes back then that can only take place in a period where we are running below potential GDP or else there will be an inflationary surge.  I totally accept it is possible that the future might be more of 2008-2022 where the USA economy keeps on running below potential GDP which means financial repression can take place without an inflationary surge.  I am just subjectively claiming that this seems unlikely.

[Southern Reactionary Dem]

More bizarre and misinformed points from jaichind:
1. The federal government faces borrowing costs that are unprecedented....over the past four years. In 2018, nominal interest rates on 10-year treasuries were similar. Of course, the real interest rate of a 10 year treasury note is negative at the moment. It's unclear how jaichind can motivate his claims about interest rates today having an impact on the level of interest payments going forward in light of this. If markets are tanking in response to rate hikes that are projected to bring the federal funds rate to their maximum in 2018, give or take a few 0.5 percentage points, this something about the neutral rate of interest as well.
2. Bluntly, his last paragraph is masturbatory. However much he might wish for there to be a fiscal reckoning, however much he might wish for Russia to defeat Ukraine, none of this is necessary. Zero justification is provided for his fantastical claims.

Here's my prediction: I think it's far more likely that the US experiences a deflationary episode by late 2023 than for the US to suffer another year where the headline rate of inflation exceeds 4 percent. In fact, my baseline prediction is that in 2023, the headline rate of inflation will be lower than 2 percent. The core rate of inflation will likely exceed 2 percent or something like this. To be clear, the transmission lag of monetary policy is very long - usual estimates are that it takes at least 4 quarters for the impact of rate hikes to be fully-felt. The best guess is that it takes ~8-9 quarters.

We're still in a regime of secular stagnation, where governments can basically run ponzi schemes. You may return to usual business in another year. Prices will be moderate, growth will be sluggish and economics will be boring again soon.

I think the core question is: After this set of interest rates increase cycle is done will real interest rates revert to historical levels (positive) or will we revert to the financial repression of 2008-2022.  If real interest rates do revert to positive levels then given the large debt to GDP ratio the interest costs will mean that primary spending will have to decline as a % of GDP.  If financial repression comes back then that can only take place in a period where we are running below potential GDP or else there will be an inflationary surge.  I totally accept it is possible that the future might be more of 2008-2022 where the USA economy keeps on running below potential GDP which means financial repression can take place without an inflationary surge.  I am just subjectively claiming that this seems unlikely.

We really need positive interest rates. Cheap debt means prices of assets rise to be commensurate with borrowing power instead of wages/savings and savings accounts are absolutely useless thanks to net negative interest rates robbing them of value. This is detrimental to the poor who are overwhelmingly less inclined to invest their money in the artificially inflated markets. The rich benefit from the debt fueled growth while the poor fall further into the hole. Just another way to silently redistribute wealth to the top.

[sting in the rafters]

It'll be interesting to see whether the Q2 earnings calls coming continue to outpace the June CPI report, that would again suggest a need to increase wages to sustain consumer buying power and evaluate rate hikes to prevent increased retained earnings from resulting in irrational investor behavior.

[jaichind]

USA Department of Labor is saying that there are fake June CPI numbers being circulated.  The data is expected tomorrow at 8 30am.  That this is taking place show how central inflation has become to the entire economic narrative. 

[jaichind]

Holy cow ... CPI YoY came in at 9.1% ... MoM was 1.3%.  This is out of control .  The Fed has to get going in 100 bp increases.

[jaichind]

It seems the gas price surge plays a good part in the price surge.  I suspect part of this is lagging in terms of housing costs.  Rent prices were surging last year but they only count toward CPI when new leases are signed with a lot of them being signed this year to reflect market rent increases from last year.  Also, supply factors I am sure play a role.  Last week's labor report shows that the labor force lost 350K people.   Not good from a potential GDP point of view.  I hope Andrew Yang is watching.  When you pay people to do nothing they are more likely to choose to do nothing. 

[Person Man]

Holy cow ... CPI YoY came in at 9.1% ... MoM was 1.3%.  This is out of control .  The Fed has to get going in 100 bp increases.

Three 75 pointers in the next year would be reasonable. That would bring us to 375-4. About where it normally is.

[jaichind]

Holy cow ... CPI YoY came in at 9.1% ... MoM was 1.3%.  This is out of control .  The Fed has to get going in 100 bp increases.

Three 75 pointers in the next year would be reasonable. That would bring us to 375-4. About where it normally is.

Fed fund swaps now have a 1/2 chance of a 100bp increase next Fed session.  Good, there has to be some sanity in the system.  Frankly, I think it should be higher but given how timid the Fed is I accept 100bp is the largest I can hope for.