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by worstspotgain 589 days ago
The goal in increasing rates is to cool the economy by reducing construction, i.e. housing starts. Exchanging existing units doesn't affect employment and output as much. Since starts dropped by a third, it follows that prices would have been even higher without the raise in rates.

> we really won't know for sure for at least a decade or so

We absolutely already know. The contractionary effect of a raise in rates is largest in the short term. You can't have a lagging effect after rates are cut if there was no contraction to begin with.
1 comments
_heimdall 589 days ago
> The goal in increasing rates is to cool the economy by reducing construction, i.e. housing starts

That may be a goal, but it isn't the goal. The fed doesn't directly control interest rates on new construction, they control the fed funds rate. Their changes impact the cost for banks to borrow money regardless of the type of loans they underwrite. Increasing rates should decrease demand for new construction, but it decreases demand for existing homes as well. It also negatively impacts employment and many other areas, basically if your run on debt the higher rates hurt.

> We absolutely already know. The contractionary effect of a raise in rates is largest in the short term. You can't have a lagging effect after rates are cut if there was no contraction to begin with.

What makes you say that? Lagging effects after a rate cut aren't directly controlled by, or limited by, what effects we currently have - they wouldn't be lagging if the effects must have already happened. More importantly in my opinion, contraction isn't an absolute and requires a baseline for comparison.

After rates are cut we can't distinguish between a contraction relative to where we would have been without intervention. Comparing against a gross number isn't particularly helpful.

For example, say we had a house worth $100k and it was on track to be worth $110k next year. If we intervene and now it will only be worth $105k next year, wasn't that functionally a contraction induced by the intervention even though it didn't fall below the present value of $100k?

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worstspotgain 589 days ago
> it decreases demand for existing homes as well. It also negatively impacts employment and many other areas, basically if your run on debt the higher rates hurt

The question is not what's affected. It's how much monetary policy it takes to achieve the desired output and employment effect, and where is the employment effect. We want to stop increasing rates once the effect is achieved.

We raise rates because the economy is overheating. Too much money is chasing too few goods, raising prices. In response to the favorable prices, too many jobs are chasing too few workers, raising wages.

Rising prices and wages (without rising productivity) means inflation. We're at one edge of the Phillips curve [1] and need to move back to the middle.

> That may be a goal, but it isn't the goal.

The goal is actually to raise unemployment. That's what the "cooling the overheating economy" euphemism means. However, we don't have the tools to raise it evenly in all sectors. The only tool we have is the short term interest rate.

Luckily, it affects the long term rate, which affects demand for homes, new and existing. For (say) every 20 fewer homes sold, one realtor and one banker might go unemployed. But for every 20 fewer new homes built (say), 50 laborers might go unemployed. That's why the transmission is primarily through construction [2] [3]. The consumer durables sector (appliances) used to have a large multiplier too, but most of those manufacturing jobs have been automated or moved overseas.

> they wouldn't be lagging if the effects must have already happened

You can model the lag effects as geometric decays of the original impulse. You need a negative original effect (one impulse of high unemployment) that will then regress back to baseline (continued but fading unemployment.) We didn't have any impulse, hence no decay.

The only thing that could really go wrong is a resurgence of inflation if the cuts were too fast, but chances are we would have seen that already too.

> relative to where we would have been without intervention

The problem here is we were at too much output/employment. We had to get through that moment and fix the problem without overshooting in the opposite direction.

We couldn't do better, that's the whole point. It's not like there was potentially more output to be had. The actual problem is that output was too high. That's why there was inflation.

[1] https://en.wikipedia.org/wiki/Phillips_curve

[2] https://www.usnews.com/news/economy/articles/2022-12-20/new-...

[3] https://www.infracapfunds.com/post/why-the-us-is-unlikely-to...

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