[XIVMagnus]

I would love to understand why the fed hasn't increased interest rates to counter the rapid increase of inflation..?

I remember learning some basic economics in 2019 about how the U.S. learned a valuable lesson from 2008. How they will never make the same mistakes of letting inflation go unchecked because they have tools to work against it. Yet inflation has rapidly scaled to 6.8% (reported). Also, I am keeping supply chain demand in mind but I don't think it excuses the fed's decision to not immediately start curbing high inflation rates. My guess is that people with money are profiting and want to continue profiting until it is no longer sustainable.

[neffy]

It won't stop the inflation. When inflation is due to printing money, the only thing that can be done is to sit back and wait for it to work it's way through the system. All raising interest rates would do is trigger a rerun of the Savings and Loan Crisis, as the huge quantity of long term, fixed rate, low interest rate loans, is suddenly devalued by short term, high interest rate loans. (Which is probably going to happen anyway, because Central Bank control over interest rates can be more than slightly illusionary at times like this. (Lenders can work out inflationary devaluation rates just as well as anybody else can.)

2008 was a very different scenario, the money that was printed then was forced into a narrow loop within the financial system and just used to sanitise a lot of bad debt away from the banking system.

In some sense, the eventual logic of the last 20 years of massive increases in the total amount of debt circulating, due to loan securitisation, was that that debt would have to be devalued to make it repayable. And here we are.

[anm89]

I disagree with this. Powell could blow up the entire economy in about 5 seconds if he wanted to by saying rates will be 4% in June and inflation would be done tomorrow. Housing would tank, the stock market would tank, unemployment would sky rocket, wage growth would immediately stop and probably revert a bit. Inflation could have some ups and downs from there but I don't think it would average above 2.

The problem is we can't raise rates without blowing up the economy, not that it wouldn't stop inflation. It doesn't matter how much money is in the system if you nuke velocity back to near zero.

I'm talking in the medium term here. Because the response to this is in my mind literally a 10-20 trillion dollar stimulus package. THEN we will see inflation.

[unyttigfjelltol]

We're assuming the lever of markedly higher interest rates over a long period of time, generates in this tremendously complex economic machine, the output of lower consumer inflation. I'm not sure we'll see that lever pulled anytime soon, and if we do, I'm not confident it will work precisely as you describe.

Asset price inflation will reverse. But that wasn't trickling back to consumer inflation anyway.

Think of it this way. If you had 10x your annual salary to store somewhere, and the values of traditional stores of wealth (e.g., stocks, bonds, and real estate) were seriously stuck in reverse for the foreseeable future, where would you stash your value? Sardines? Bottles of wine?

We forget how young modern finance is, basically since the 1970s. For the first 10 years of that era, both interest rates and consumer inflation increased in tandem. We've built a narrative around that correlation, but what if that narrative is incomplete?

[jyounker]

Inflation in our circumstances isn't due to an increase in the money supply. Here's why:

* Aggregate demands isn't too much different from before the pandemic. * Demand for services has fallen into the toilet. * Demand for goods has gone through the roof.

This massive reallocation of resources from one portion of the economy to another has created a situation where demand for goods far outstrips supply. Therefore we have inflation. (Increases in food prices are caused congestion in the labor market.)

This is not about US economic policy. You can see this by looking at inflation rates in Europe (and specifically Germany). These countries have very different economic policies than the US, but their inflation rates pretty much track what's happening in US. Therefore it is a common effect driving inflation in both places.

[neffy]

Perhaps have a look at recent US money supply behaviour before you get too confident on that one. The EU´s is not much better.

https://fred.stlouisfed.org/series/M2SL

[jyounker]

What's the point? Other countries have widely diverging monetary policies from the US, but they're undergoing the same inflation spikes in the same areas of the economy. If the money supply was the cause then we'd expect to see these diverge, and they're not.

On the other hand we've had months of prices yo-yoing across the economy, both rising and falling. If it was about the money supply then we would not see price decreases following many increases. (e.g. lumber costs a few months ago.)

We also having diverging demand for goods and services.* If it was just about the money supply, and not a demand imbalance then we'd see increases in both demand and cost for services, and those matching increases don't seem to be there.

*See page point 9, page 12/16 of https://www.brookings.edu/wp-content/uploads/2021/09/COVID-F...

[voisin]

> When inflation is due to printing money, the only thing that can be done is to sit back and wait for it to work it's way through the system.

Source? This doesn’t seem right to me at all.

[samspenc]

I suspect there is no source for this, but OP is just summarizing what the Fed is hoping will happen -- basically they have printed too much money but they don't want to raise interest rates either, so they are just going to sit back and wait for the excess money to flow through the system.

[golemotron]

What do you make of the rumors that the Fed will start to hike interest rates next year?

[trcarney]

They won't, there will be too much political pressure for the president with the mid term elections coming for the fed to take the risk of raising rates. If they want to raise rates, they will do it in 2023 so the current regime can blame the fall out on, I'm assuming, the newly elected Republican Congress.

I'm assuming the next cycle will be a huge win for Republicans for two reasons.

1) Things we saw in this last election. For example, a truck driver won in New Jersey against their senate president with a campaign budget of $153

2) Joe Biden's approval rating the the the high to mid 20's

[sharken]

It's interesting how the unpopular decisions are pushed back, but i think that's an accurate assessment of what will happen.

Biden have just dipped below 40% approval rate and has a lot on his plate with the texan abortion law:

https://fivethirtyeight.com/features/texass-abortion-law-is-...

[jonnycomputer]

https://econbrowser.com/archives/2021/11/so-you-want-to-be-a...

[XIVMagnus]

I appreciate you taking the time to explain why it wouldn't stop inflation! Thanks a lot!

[pjc50]

Well, they've written their reasons down: https://www.cnbc.com/2021/10/19/federal-reserve-powells-5-ke...

Basically they can only control inflation in the future, and they believe the inflation we've just seen is a result of the one-off of the pandemic response. Given that the interest rate mechanism affects inflation by increasing unemployment and harming the economy, they don't want to do that until it's necessary.

(I should note that it's theoretically possible to do inflation control by fiscal policy, i.e. mop up some of the spare money by taxation, but that's obviously not going to happen)

[dantheman]

Probably better to just reduce government spending than increase taxes.

[wbsss4412]

Do you believe it is ever proper to raise taxes?

I can’t help but assume that this is a fairy dogmatic, rather than a nuanced response.

[sleepysysadmin]

>I would love to understand why the fed hasn't increased interest rates to counter the rapid increase of inflation..?

Collapse of the underlying assets that they hold. Bailing out the housing market during the pandemic means the fed holds lots of housing market. The theory is that they will let the assets mature and then pull the money back out to come back to a balance. I'll tell you now, if you believe that's about to happen I've got a bridge to sell you. The US still hadn't done this the day before covid started. Covid is far worse.

>I remember learning some basic economics in 2019 about how the U.S. learned a valuable lesson from 2008.

The irony is that the financial crisis at least help the USA today. Compare this to other countries like Canada and we are far worse off than the USA during the financial crisis.

>How they will never make the same mistakes of letting inflation go unchecked because they have tools to work against it.

Those tools are maxed out.

> Yet inflation has rapidly scaled to 6.8% (reported).

The fed made the claim that they would run inflation hotter because they didnt hit target of 2% during covid. The problem? They had to act by now. They've past that threshold of coming to parity.

>Also, I am keeping supply chain demand in mind but I don't think it excuses the fed's decision to not immediately start curbing high inflation rates. My guess is that people with money are profiting and want to continue profiting until it is no longer sustainable.

The metric to look at was GDP. When GDP was 6.7%, inflation was at 5.4% or so. The big problem is that gdp dropped to 2.1% and recession metrics spiked.

If the fed increases rates while gdp is dropping. recession is certain. It's too late for them to undo what they did bailing out the housing market. It would seem counterproductive to spend all this money to prevent housing from crashing just to let it crash anyway.

So we're stuck. Inflation is going sky high. It looks to be about 40% locked in right now over the next few years.

You thought minimum wage wasnt keeping up? This is literally everyone except the rich getting much poorer soon.

[long_time_gone]

Other data points worth noting:

- Wages in the US increased 9.8% in October of 2021 over the same month in the previous year. https://tradingeconomics.com/united-states/wage-growth

- The Estimate for Q4 GDP growth is 8.7%. https://www.atlantafed.org/cqer/research/gdpnow

[greedo]

Wait, you're predicting 40% inflation in the US over the next few years?

[hermitdev]

Not the person you're responding to, but 6.8% compounded over 4 years is 30%, at 5 years, you're at 39%...

[greedo]

Yes, but that's not what the parent was saying. They were clearly implying 40% YoY, which is beyond even zero hedge nonsense.

[sleepysysadmin]

>Wait, you're predicting 40% inflation in the US over the next few years?

So is many others. It's possible to look at the numbers and make the assumption the central banks won't reverse this. Afterall that basically never happens in history.

M0 money supply was increased about 100%. M1 was increased by about 400% Those arent direct relationships, M2 on the otherhand... the bump from covid and increase in rate clearly denotes about 40% inflation locked in. It wont show up all in 2022. It'll spread out over time. But worse yet, what happens in between?

[XIVMagnus]

Thanks a lot for the explanation! I greatly appreciate you taking the time to break things down for me.

[sleepysysadmin]

>Thanks a lot for the explanation! I greatly appreciate you taking the time to break things down for me.

It's a super complex issue that even the Fed probably has yet to understand. So I certainly don't as well. Many consequences could happen instead.

Flipside, what just happened? The government effectively owns a huge portion of land again. Sure someone else is holding the title but really the government owns it. The banks/funds sold it to the government because they know they dont want to hold it.

What does communism look like? The government owns everything.

[sealthedeal]

They cant raise interest rates. If they do it will be nominal. We have too much debt. If we raise interest rates we will bankrupt ourselves. Inflation helps us chip away at the debt .

[anm89]

Because half of US companies and the US government itself as long as basically every pension and retirement fund are levered up either directly or indirectly to their eyeballs in cheap debt.

Our entire system would quickly be insolvent at a rate that would have seemed low 20 years ago.

[SubiculumCode]

Lesson learned from 2008 was not fear ofinflation, it was fear of not injecting adequate money into a market after a downturn. I don't know what you're talking about.

[simonblack]

I would love to understand why the fed hasn't increased interest rates to counter the rapid increase of inflation..?

The US can't afford it.

With a national debt of 30 trillion dollars, a 1% increase in the interest rate would cost the US an extra 0.3 trillion dollars per year. In other words, an extra 300 billion dollars per year. Looked at in other terms, that's nearly half of the Defense Budget in money 'down the drain'.

The interest rate will never go up to any usable extent until the either the US Dollar or the US Economy (or both) crashes.

[drdec]

> I would love to understand why the fed hasn't increased interest rates to counter the rapid increase of inflation..?

One reason is that they are still purchasing assets in order to goose the economy. It doesn't make any sense to be revving the economy with one hand while tamping it down with the other plus the point of the buying is to artificially depress interest rates. IIRC at the last meeting they announced that they would accelerate the tapering down of asset purchases so that they would be done in March.

They also like to move slowly which is why they don't just halt the asset purchases and start raising rates. They treat the economy with kid gloves so they don't break it (right or wrong, for better or for worse, that's how it goes).

[throw0101a]

> I would love to understand why the fed hasn't increased interest rates to counter the rapid increase of inflation..?

Will increased interest rates unclog ports and reduce transportation costs? Will it reduce gas prices? Will it shift spending from goods to services?

It is necessary to look at the components of the CPI to see where the increases came from instead of looking at just the headlines.

[myth_drannon]

Housing and Stock market bubbles will implode.

[voxadam]

If they're bubbles aren't they going to implode regardless?

[xwdv]

Bubbles don’t have to implode. They can just reach a point where there’s a long consolidation and things are sideways until reality fully rationalizes the bubble and it shrinks.

This happens all the time with stocks. A stock could get very bubbly and reach an insane valuation to the point people think it will pop! But then it never does, instead it just stops rising and the underlying company eventually catches up to the valuation, until people think it’s a good buy again and start pumping the price even higher to the next leg up. Eventually the stock can never truly pop and go back to the pre-bubble levels because in the time that has passed the company actually did become more valuable.

[CrimpCity]

My understanding is that increasing interest rates would tame inflation however there will be a slight recession or dip since prices will fall and given the upcoming elections the powers that be want a VERY gradual uptick with minimal economic fallout. You’re damned if you do and damned if you don’t.