[yuan43]

Zero direct evidence for the title's claim was provided in the article.

All the Fed is doing is to normalize interest rates. Deeply negative real yields (5% or more) are aberrations that history has shown to ultimately lead to catastrophe.

Yet talking head and Dem Senator alike are treating rate normalization as financial Armageddon.

Somebody tell me how at the very least a 0% real yield on cash is going to kill the economy. Now explain what's normal about that.

[uup]

It’s going to kill the economy because the Fed is basically setting up perfect conditions for stagflation. Congress and the Fed caused the M1 money supply to 5X in just a period of two years. Of course there is going to be inflation in such a scenario. And yes, while the money supply isn’t the only factor that determines inflation, it certainly is a part and such a drastic change in the money supply almost certainly is a major cause of inflation.

But at least labor is strong. People are working and yes, they’re being squeezed by inflation, but they at least have some opportunity to change jobs for a raise or form a union to demand a higher share of profits. And that’s what we’re seeing in the economy. Now the Fed is saying that they want to pull some of the money back in, but the only way to do that is to hurt employment. People won’t get raises. People will be afraid to unionize. And Powell himself has said he has no idea if raising rates will even work to tame inflation. And despite this uncertainty, Powell has his pedal to the metal. He’s raising rates so fast he’s not even stopping to assess impact. So we’re basically trading a bird in hand (low unemployment) for two in the bush. People should be very afraid.

[pgwhalen]

> Congress and the Fed caused the M1 money supply to 5X in just a period of two years.

Oft-repeated, but incorrect. The way M1 is calculated was changed in 2020, and the apples to apples comparison is actually a little bit less than 2X.

https://fred.stlouisfed.org/series/M1SL

[VirusNewbie]

fucking lol. 2X!!!!!! That's still unfathomable. We're lucky everything didn't double in price.

[lithos]

Not really inflation happens where the cash flows. And very little of that cash flowed into normal markets.

On the other hand you can point you can look at the stock market still increasing/staying level in COVID, to figure out where inflation hit first. (Markets up in a lockdown, sounds impossible).

Right now inflation is hitting low end markets through that cash finally hitting normal markets with the wealthy trying to hedge with land/properties, and wage increases.

[uup]

A lot of money did end up in normal markets. There is a lot of data for this. For instance, the Fed offers something called a reverse repo facility that allows institutions to deposit money overnight at the Fed. This is typically leveraged by money market funds. Over the course of the pandemic, the amount of reverse repo operations grew from 0 to over $2T.

A lot of the expansion was done via Covid stimulus, which put money directly into the hands of businesses and individuals. Unsurprisingly, people spent this money on all types of stuff, including equities and real estate.

[uup]

Thank you for the correction.

[lamontcg]

The goal of Fed monetary policy is to contain inflation back down to the 2% target rate.

The knob they have to turn is raising interest rates. There's a lot of steps in between that and inflation coming down.

Inflation right now has a strong component of rising Labor costs because of low unemployment and workers having strong ability to bargain for higher salaries.

To achieve low inflation in the current environment, there must be more "slack in the labor market" which comes about through higher unemployment and less ability for workers to bargain for their salaries.

The mechanism that this happens through is by making bad investments that have been funded by loans taken out at very low short rates to fail via higher interest rates and for those effects to ripple through the economy, ultimately destroying jobs.

The only problem with the title of the article is that it should have been written "The Fed's plans will sharply boost unemployment".

They plan to lower inflation by rising interest rates, but unemployment has to rise for them to hit their targets.

I also would bet that soon, as is typical in all recessions (and it never, ever true that "this time it is different") that there will be a financial collapse when the tide goes out and we see who has been swimming naked.

[laylower]

Iamontocg, this would have been a sufficient explanation in a market with no interdependencies. Yet, the cause of the problem is not workers aiming for a living wage when the income inequality is at its all-time high.

Inflation causes vary: 1) Covid business loans 2) Cost of logistics post covid 3) Corporate profits recently hit all time high 4) FX rate with EUR and GBP

I agree that the vanilla solution seems to be the most effective - the knob as you called it. But that doesn't mean that it's going to be painless when credit expansion and overleveraged businesses and people are hit with the new higher rates.

[lamontcg]

I don't know what made you think I suggested that this would be painless

FX rates are also the result of twisting the knob, not the cause.

And there's a lot of other factors in inflation, but the wage inflation is the one that has the Fed worried. The Fed knows everything else is cyclical and they weren't worried in the commodities boom and high oil prices in 2010-2014. The reason why they're so worried now is wage inflation. We haven't had wage inflation this high in 30 years and the Fed hasn't thrown on the brakes this hard since I can remember. This isn't the 25bp tightening every meeting of the Greenspan Fed.

[thunky]

But there is no wage inflation overall. In real terms, wages are declining except for maybe the lowest earners [0]. For some reason that's unacceptable.

[0] https://www.americanprogress.org/article/wages-and-employmen...

[lamontcg]

> In real terms

Nominally they are increasing, that is a component of inflation. Inflation-adjusting the nominal rise of prices that are causing inflation just hides the inflation. You can't analyze it that way.

> For some reason that's unacceptable.

I'm not the Fed, I don't support what they're doing, I'm just explaining it.

EDIT: research from the Fed:

https://www.frbsf.org/economic-research/publications/economi...

Wage growth is over 6%. The fact that inflation overall has been running higher than that so real wage growth has been negative doesn't mean there's been no wage inflation.

Inflation is just the rise in prices. You're thinking about the overall effect on society, but that is second/third/fourth order effects.

Nominal wages rising 6%, even though real wages are rising 0% still means an environment with 6% overall inflation, which exceeds the Fed's target of 2%.

[paulmd]

> Inflation-adjusting the nominal rise of prices that are causing inflation just hides the inflation. You can't analyze it that way

Actually you can not just analyze but neutralize it that way. If everyone agrees to a wage that is indexed to inflation, and then starts numerating prices in that inflation-indexed currency... suddenly you don't have inflation anymore.

https://en.wikipedia.org/wiki/Plano_Real

Maybe the US is starting to get to the "inertial inflation" situation, with workers demanding wages accounting for expected future increases and companies starting to structure costs along those expectations as well.

[theropost]

In Canada, Ontario was forecasting a $30 billion dollar deficit for the current fiscal year. When the final numbers were in, they reported a $2 billion dollar surplus - even with higher expenses. The nominal revenue growth was 11.9% - inflation boosts the coffers.

[landemva]

For your item 1, those loans became gifts.

And point 5 could be ever-increasing federal spending beyond federal taxation.

[addicted]

Your statement is false. The Fed has told us why it’s raising rates. It’s NOT to normalize historically low rates. It’s to fight inflation. There is nothing to debate here. The Fed has said it explicitly.

The second part, whether the Fed is hoping to do this by increasing unemployment isn’t as trivial to show. However, we can be almost certain this is true because: (1) since inflation is not due to monetary weakness (the USD is historically strong and has been for the past few years) the only other way the Fed can cause inflation to reduce is by making the economy weaker, which will traditionally lead to lost jobs and increasing unemployment, and (2) the Fed keeps saying that it thinks it can achieve a soft landing, ie, without putting us into a recession and leading to massive job losses, which indicates that they are also aware that they may cause a recession/unemployment growth, and are only kind of hoping they can avoid it.

[starkd]

Investors have become addicted to easy money, so that outlook is embedded in the whole economy. Perhaps higher yields can produce better investments, since there will be a cost to these loans.

[spaceman_2020]

I can’t see how killing off a bunch of zombie companies surviving on cheap debt is bad for the economy in even the medium term.

[starkd]

Killing off the zombie companies will drive unemployment rate higher. Good in the longer term, but it won't come without a cost. That's the price we pay for such an extended period of cheap credit.

[slenk]

Zombie company to me sounds like a shell company with one or two people - that is not going to spike unemployment. Unless I don't understand what a zombie company is

[cj]

Based on context, I’m guessing they mean companies that are “Alive” when they should be “Dead”

For example, many public company SPACs, many highly funded VC startups, and a vast variety of other companies that employee hundreds / thousands of people without ever having made a profit (and worse, many of them with negative gross margins - meaning even if they trimmed operations to barebones they still wouldn’t be profitable)

These sort of companies proliferate when VCs and investors run out of high quality companies to put their cash into. Which tends to happen when money is “cheap” (which is another way of saying “when interest rates are extremely low”)

[bombcar]

Zombie company usually means a company that should close down but continues to exist because capital is soooooo cheap.

Imagine things like unprofitable companies that are riding venture capital, etc. Uber could be one, perhaps.

[spaceman_2020]

That, and unprofitable companies taking on larger and larger piles of debt to continue their operations. IIRC some 15-20% of listed companies fall in that category.

[speakfreely]

That's not what they're talking about. They're talking about companies that are inherently unprofitable or barely profitable but hire huge sales or marketing teams to drive revenue growth, which enables them to seek cheap debt and venture capital to keep the music playing. These companies employ hundreds, thousands, maybe tens of thousands of sales people, marketers, and all the HR/security/facilities/IT staff that support them.

Killing zombie companies will be devastating to all these people.

[VictorPath]

> the central bank projected its benchmark rate hitting 4.4% by the end of the year

> "There will very likely be some softening of labor market conditions," Powell said

> The Fed forecasts the unemployment rate to rise to 4.4% next year, from 3.7% today

The fed changed its rate, forecast a change in unemployment due to that and said there was a "softening of labor market conditions". I guess that counts as "zero direct evidence" in your book for fed intentions. What does Powell need to do for you, walk up to factory gates and do a Donald Trump "you're fired"? I guess when Volcker jacked the rate up in the 1980s and unemployment shot up as well, there was no cause and effect there either.

Some commenter here have a positive or negative view of the rate hike, but either way, it is quite clear to most people, including CBS News, what the fed is intending.

[votepaunchy]

>> The Fed forecasts the unemployment rate to rise to 4.4% next year, from 3.7% today

> The fed changed its rate, forecast a change in unemployment due to that and said there was a "softening of labor market conditions". I guess that counts as "zero direct evidence" in your book for fed intentions.

The headline says “sharply boost”.

[civilized]

A non-negative real yield on cash means its purchasing power never decreases. Is there an objective reason that the purchasing power of cash should never decrease? Negative yields encourage economic activity and discourage hoarding (use it or lose it).

[uup]

That’s the economic orthodoxy. The semiconductor industry has been deflationary since its inception and there’s been plenty of economic activity.

[rightbyte]

Why would you want economic activity for the sake of it. Sounds wasteful.