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United States The Almighty Buck

The Fed May Discuss the Biggest Interest Rate Increase Since 1994 (nytimes.com) 304

Posted by msmash from the shape-of-things-to-come dept.
The Federal Reserve is likely to discuss making its biggest interest rate increase since 1994 at its meeting this week, as a range of new data suggest that inflation is coming in hotter and proving more stubborn than policymakers had hoped. From a report: Central bankers have been promising to be nimble as they fight inflation -- a stance that will probably prompt them to at least discuss whether to raise interest rates by three-quarters of a percentage point on Wednesday, when officials are set to release both their decision and a fresh set of economic projections. The Fed raised rates by half a percentage point in May and officials had suggested for weeks that a similar increase would be warranted at their meetings in June and July if data evolved as expected. But costs have not behaved as anticipated.

Instead, a report last week showed that inflation re-accelerated in May and is running at the fastest pace since 1981. Two separate measures of inflation expectations, one out last week and another released Monday, showed that consumers were beginning to anticipate notably faster price increases. That is sure to increase the sense of unease at the Fed, which is trying to quash high inflation before it changes behavior and becomes a more permanent feature of the economic backdrop. Jerome H. Powell, the Fed chair, and other officials have repeatedly stressed the need to bring prices back down to a stable level to ensure a healthy economy. The string of worrying news has caused economists and investors alike to bet that the central bank will begin to raise interest rates at a more rapid clip to signal that it recognizes the problem and is making fighting inflation a priority.
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The Fed May Discuss the Biggest Interest Rate Increase Since 1994 More

The Fed May Discuss the Biggest Interest Rate Increase Since 1994

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  • Print tons of money... (Score:4, Informative)

    by bradley13 ( 1118935 ) on Tuesday June 14, 2022 @04:56AM (#62617496) Homepage

    Print money at a record-breaking pace, then act surprised at the consequences. Who could have expected this? /s

    Inflation is actually far higher than the government admits. Visit ShadowStats for a more realistic view.

    • Ah yes what a deal. Only $175 for opinions on a 1990s style website.

    • Re: (Score:2, Insightful)

      by thegarbz ( 1787294 )

      Print money at a record-breaking pace, then act surprised at the consequences. Who could have expected this? /s

      The current inflation has precisely zero to do with "printing money" and is affecting many countries, not just the USA. So while you're right with your "Who could have expected this", you are completely wrong as to the cause in this case, critically because not that much money was actually printed.

      Economics is more complex than what Fox News pundits will tell you.

      • The current inflation has precisely zero to do with "printing money" and is affecting many countries, not just the USA

        That's because the U.S.A. has made much of the world dependent on dollars, and so created worldwide inflation through the creation of excess money.

        The literal definition of inflation is an expansion of the money supply, which is what happened - we just notice here last by design, because the inflation is spread globally. Now that we are noticing it a large potion of the world is screwed and

        • Re: (Score:3)

          by ranton ( 36917 )

          The literal definition of inflation is an expansion of the money supply

          That is not correct. Inflation is a decline in purchasing power. It is arguably caused by having a money supply which outpaces available labor and raw materials. We have been printing money for decades without significant inflation, because the economy was growing along with the money supply. That required significant immigration and offshoring to obtain the labor necessary for the economy to grow at that pace. It's also very likely that reduced cost of labor from offshoring mitigated significant inflation

    • Re:Print tons of money... (Score:4, Informative)

      by ranton ( 36917 ) on Tuesday June 14, 2022 @10:48AM (#62618318)

      Print money at a record-breaking pace, then act surprised at the consequences. Who could have expected this?

      No one is surprised, but also no one should have expected this. We have been printing money for decades without significant inflation. But now we have a restricted labor pool and increased money supply, which in tandem cause inflation. The parts no one expected was the long-term reduction in the labor pool and the long-term problems with shipping. These factors, in combination with printing money, have caused the inflation we see today. We almost certainly would have seen high inflation even without excess printing.

  • Per https://tradingeconomics.com/u... [tradingeconomics.com] , raising the interest rate by 0.75% will still not increase it to what it was even in early 2019. You don't stop the worst inflation in 40+ years by rolling back the clock on the interest rate by 2 years.

    For most of the early 1980's the interest rate was greater than 10%. That's what we need the interest rate to be if we want to stomp out inflation. Sure, raising it by 10% in one fell swoop will prob crash the economy. Unemployment will go up but prices will go down as

    • IMO, monetary stability is the best path forward. If markets believe that the value of the dollar is likely to remain stable, give or take, then they can plan and make rational economic decisions. High and especially unpredictible interest rates mean they can't, and they will not make the investments today that will keep people gainfully employed for the coming years and decades.

      But I do understand the problem with the higher interest rates that will needed in order to achieve this. I lived through the p

      • 1st paragraph should read in part "High and especially unpredictable inflation rates mean they can't..."

        High and especially unpredictable interest rates do the same, but to a lesser and more temporary extent, as explained in subsequent paragraphs.

      • That's the catch. I read somewhere that each 1% rise in interest rate costs the USG in debt servicing costs about the same amount as an entire additional US Navy. It was easier to raise interest rates in the 80s because debt to GDP was a fraction of what it was today. https://fred.stlouisfed.org/se... [stlouisfed.org]
        • And that was part of why a lot of us warned that the subsequent growth of the federal debt was unsustainable, and could lead to one or more of: (a) default; (b) hyperinflation; and/or (c) Soviet-style collapse, with federal power essentially gone, and most if not all of the traditional functions of government reverting to the states, some of which would then likely fail as well. Any of these could also lead to civil war. These are all very large sparks, and I don't think it would take much more than a ver

    • They're probably doing it too slowly too late. But exactly that - jumping several percentage points will create panic across whole industries. Large businesses could suddenly find just the cost of debt makes them insolvent. But the lights have to come to full brightness and the cockroaches need to start running.

  • Train Wreck in the making (Score:5, Interesting)

    by orlanz ( 882574 ) on Tuesday June 14, 2022 @05:00AM (#62617502)

    The Feds really should have raised the interest rates during Obamas' last year. At the very least they should have taken the opportunity to offload the massive save they did during the housing bubble of 2007. Yes, it could have been far worse, globally. It was still a good opportunity for the first two years of Trump's term.

    But nope, they wanted a really good recovery; show the world that the US can still pull off the early 2000s. The economy knew the low rates were unhealthy and gone on too long. But the economy was addicted to. Congress nor the Feds ever really addressed this addiction. Companies were and kept getting deeper debt leveraged due to the low interest rates. Now those companies (many "Too big to fail") don't know how to service a "monthly minimum due" increase.

    And when the rise started to peak, the Trump administration politizied the Feds. We had morons who couldn't add 2+2 talking about how rates should remain low and keep the economy "healthy". Just ignore the majority of economists and 100 years of economic models. Thankfully, our cousins in the EU been messing around with negative interest rates since Obama's time and the US had already decided it would be pretty bad for our economy to remove the "zero" rate rallying point.

    Now, 7 years behind schedule, we are taking drastic measures to keep atleast one foot on a really fine line. I think we will be fine, but I am sure everyone is expecting a few backruptcies and atleast a quarter of recession. These would be major achievements for Mr Powell if that is all we face. I am just glad Congress was mature enough and didn't politicize the nomination.

    I think the economy should expect leaping interest rates as Powell was never keen on near-zero rates. He isn't an economist which we normally consider a negative, but being one didn't prevent this mess. Unfortunately, he will probably get fired at the end. Until Trump, low rates were soley a Democrat thing and Republicans generally want higher rates. So after the next election, I don't see either side being nice to Mr Powell for what he did.

    • Re:Train Wreck in the making (Score:5, Interesting)

      by quonset ( 4839537 ) on Tuesday June 14, 2022 @05:25AM (#62617532)

      Thank you. Came here to same, minus the last paragraph. Republicans always want low rates because that covers up their out of control spending and helps the 1%.

      But yes, rates should have been raised years ago. Keeping interest at effectively 0% was ludicrous to begin with. No sane nation (I'm looking at you, Japan) should ever get down to that level. Once you're there there's no wiggle room. You can't go negative because that causes a whole host of other issues.

      Right now we should be at 2.5%. High enough to cool things down, but low enough that borrowing isn't prohibitively expensive.

      • Re:Train Wreck in the making (Score:5, Interesting)

        by RobinH ( 124750 ) on Tuesday June 14, 2022 @06:55AM (#62617624) Homepage
        They did effectively go "lower than zero" by quantitative easing (buying bonds). They had actually stopped that and started quantitative tightening (selling bonds) before the pandemic, and then they reversed course and went back to quantitative easing at a faster rate during the pandemic. Now they've leveled off, and if you think rising interest rates are bad, just wait until later this year when they start selling off those bonds again. Money is going to become a lot more expensive to borrow, and that's going to kill anyone who speculated on the housing market. I pity anyone who bought in high with a variable rate mortgage. (We actually have a variable rate mortgage, but the principal is so low now that it doesn't really matter.)

        • Re: (Score:2, Flamebait)

          by drinkypoo ( 153816 )

          Money is going to become a lot more expensive to borrow, and that's going to kill anyone who speculated on the housing market.

          I hope so, because housing speculation is dominated by corporations which are fucking us by driving up costs, and few are more deserving of losing their shirt.

      • Re:Train Wreck in the making (Score:5, Interesting)

        by orlanz ( 882574 ) on Tuesday June 14, 2022 @07:05AM (#62617636)

        For me the old Republicans were quite different from the Tea Party era onward; think pre-2000s. Both parties have a general idea that rates shouldn't be too low. Neither wants inflation to run rampant but both want some inflation... how much is where they differ. To severely oversimplify, Dems want more cash circulating, Repubs want more IOUs running around. Neither is a bad position if it doesn't tip into their bad areas. And bad areas is all that the media talk about and cause fear of.

        Dems really wanted pensions, increase in small businesses, stable farmers, and non-FreeTrade polices. For all of those, low interest rates help with borrowing. Pensions can be better financed and appear vaulable and risky promises can be mitigated via natural devaluation. It allowed farmers to get loans they could weather better in bad times or have the govt cover/forgive with less cost. Small and local businesses could get big financing with little collateral to compete against larger established or well funded foreign ones. Also allowed lower insurance rates for the above.

        Old Republicans went with higher rates. This is the party I genrally align with and thus can provide a larger set of reasons:

        This forced mismanaged entities to be quickly removed from the pool. It encouraged free trade agreements because it didn't hide where we were deficient in meeting our needs and thus actively seek trading partners for them. It also encouraged foreign investment in local companies.

        It held banks to a higher standard of risk assessment and indirectly capped how large they could get (held more in backing). It also forced them to get a return on savings; meaning they had severe obligations & liabilities that forced them to run a cleaner business. It also forced large companies to take less risks in their ventures and be more stable longterm.

        Also relieved some risky trading in the stock market as savings & bonds were a good competitor. It forced the citizens of State, County, and City governments to be more frugal and better assess bond backed projects; as the higher rates better accomodated the true costs of project overruns in time and budgets.

        I don't know what is a good lending rate is today. Feds don't have it easy with so many bubbles and skewed S&D curves. I would argue that sometime between Obama's last and Trumps' first two years, we should have hit 4 or 5%. And backed off from there on Trump's tail end. Not sure how far we would need to back off thou. The increase would have certainly cooled the economy but would have popped a bunch of today's bubbles.

        On a 10 year term, I prefer a 3% inflation rate. I found this comfortable and proven. Thou Mrs Yellen prefers a 2%... A value I never really undersood the reasoning behind other than "This is what we globally naturally gravitate toward.". Remember the dollar is a global currency... But that logic just doesn't sit right with me. I feel more, shoot at 3% and end somewhere between 2-3. And if you cross 3% avg, then there is no doubt you are in the wrong place; needing correcting.

      • Re: (Score:3)

        by GoTeam ( 5042081 )
        I'm pretty sure that $1.9 trillion "America Rescue Plan" spending didn't help with inflation.

      • Thank you. Came here to same, minus the last paragraph. Republicans always want low rates because that covers up their out of control spending and helps the 1%.

        Just bizarrely divorced from reality [wikipedia.org].

        Held at 0% throughout all of Obama's two terms and then brought up to 2.5% under Trump. How is your claim in any way supportable?

        It was only brought back down at the start of the pandemic as one of economic levers people were desperately trying to pull to stave off a feared collapse. Which might well have been a mistake (in hindsight). But hardly supports your thesis.

      • No sane nation (I'm looking at you, Japan) should ever get down to that level.

        Many western nations are currently at that level, but correct now is the time it should raise somewhat.

    • Re: (Score:2)

      by DarkOx ( 621550 )

      I think at this point rate hikes don't matter. Actually I'd go further and suggest that rate hikes will do more harm than good at this point. I agree we should have raised rates and run off the balance sheet much earlier. However the FED did not do that. They kept rates low and the left the balance sheet expansion of the 2008-2012 years remain. As a tool the FED rate is broken.

      What I think would help most is if they just left rates a lone. The healthiest of the market makers could continue to access thos

      • Re: (Score:2)

        by orlanz ( 882574 )

        I generally agree with your post. It is more or less what Mr Bernanke & Mrs Yellen enspoused. The only deviation was that the Fed should use the rate as a buffer to mellow out the spikes and valleys of the economy. This is the general consensus of economists. Mr Powell isn't one and I think he feels the rate is the only real buffer the Feds should use. Printing money, quantitative easing, buying specific market securities, etc aren't his thing. This severely restricts the Feds but that may not be

      • You can't reduce the balance sheet without raising rates. No one will buy the debt. When the Fed doesn't buy that T-Bill that rolls over, someone else has to. And it is an auction.

        • Re: (Score:3)

          by DarkOx ( 621550 )

          This is not true. The Fed funds rate (the rates we are talking about) is the rate the fed suggests for inter-bank lending and what it makes available to certain market makers at its own "window".

          It is not the rate the T-Bills command. That as you say is an auction and coupon rates will reflect the markets appetite for the debt. Generally as long as those rates are above the funds rate someone will buy because t-bills are considered very safe, in some cases we have seen government bonds be sold for lower tha

          • If t-bill rates are significantly higher than fed funds rate, a smart person will just borrow from the fed and buy t-bills. They generally are quite close. Here is an analysis. https://www.thestreet.com/mark... [thestreet.com] And as the article points out bonds and notes are less related since they are longer duration. As to drawing down at a loss, somewhat problematic. The fed gives its profits to the Treasury. A loss is a bit messy.

    • Suggesting they should have increased interest rates when, after they didn't, inflation remained subdued proves there was no justification for doing so.

      https://www.usinflationcalcula... [usinflatio...ulator.com]

      • Re: (Score:2)

        by DarkOx ( 621550 )

        It did cause inflation and it was actually pretty immediate its just that it was not distributed very evenly. It blew massive asset bubbles.

        We saw huge completely unjustifiable increases in price to earnings ratios and financial institution balance sheet growth over the period. It create a massive amount of paper consumer held assets. The money was just not circulating. Covid broke the supply chain.

        The result is those assets are being sold off now and going to buy stuff on the shelves at the local Walmar

      • No its not. Inflation is a trailing indicator. And that is really unfortunate. Because it has quite a long delay. Remember the 70's and 80's? I do.
    • If only I had mod points. Well said. And on /. too. I thought sanity had left the forum.
    • We used them in the '80s. Specifically massive government infrastructure spending. That grows the economy for real producing more goods and services and homes. The way you combat inflation without screwing over you and me is to make more stuff. If you have more stuff prices don't go up. Inflations when there's more people who want to buy then there is stuff. But since we've been doing austerity politics since the 90s and hell late 80s we have less stuff. It doesn't help that we've allowed mega mergers in or
    • This is all well and good, but how should I adjust my 401k to minimize the damage? I'm already down 10% for the year with the majority of it invested in a large cap index (which does have a 14% return over 10 years, so it seemed a good vehicle at the time). The "Government money market" fund is anemic with its returns, but at least it hasn't lost anything for the year.

  • Rock and a hard place (Score:5, Interesting)

    by RemindMeLater ( 7146661 ) on Tuesday June 14, 2022 @07:07AM (#62617640)
    I don't envy the Fed's position even though I blame them for it. If you look at at the historical fed funds rate chart [stlouisfed.org] you'll see a 40 year history of lower highs and lower lows with the interest rate. Each time they chose to juice the economy rather than let market forces clean out dead wood. Eventually you hit zero.

    The problem now is housing is sky high and raising interest rates is likely to pop that bubble in a nasty way. Oops, now you've got a housing crash. With no cheap money to roll over debt all the zombie corps are caught with their pants down. We could see commercial entities start to go bang in rapid succession like a pot full of popcorn.

    Now you've got the shit hitting the fan while Fed funds rate are still less than 1% in a 9% inflation environment. What the fork are you supposed to do then? If unemployment starts to climb while the economy craters and inflation remains stubbornly high, well, you've kicked the can as far as it will go. If you reverse course and start handing out money again you'll only aggravate inflation.

    Part of me wonders if this isn't a deliberate attempt at a controlled demolition of the massive debt load out there. We suffer through 3-5 years of 10-15% inflation and then voila, debt-to-GDP is back to a manageable 60%.

    • Re: (Score:2)

      by DarkOx ( 621550 )

      Part of me wonders if this isn't a deliberate attempt at a controlled demolition of the massive debt load out there. We suffer through 3-5 years of 10-15% inflation and then voila, debt-to-GDP is back to a manageable 60%.

      That might be an almost reasonable policy agenda, except: For it to work the government would need to
      1)Be able to keep its own borrowing cost at low rates. (Possible maybe if there is enough carnage elsewhere to investors accepting negative returns over long periods for privilege of parking cash safely; now sure I want live in that economy though).

      2)Be able to maintain revenues, and not see a commiserate growth in expenses. Tough when so much of the government activity is contracted out to the commercial wo

    • Re: (Score:3)

      by RobinH ( 124750 )
      Inflation just means that even with demand jacked up, the economy is refusing to grow to meet that demand. There are lots of reasons for this, like chip shortages, wars, etc. One thing that's keeping the economy from producing more is that boomers are exiting the workforce and the replacement generation (Z) is smaller, and there are a bunch of barely profitable companies (20% of the top 500 companies by some estimates) who have soaked up a bunch of labour and are only profitable if borrowing money is supe
  • Rates work when your own economy is the one driving the inflation. Since the US gave up manufacturing, the inflation we're seeing is a result of changes occurring outside the US economy. We're in a stagflation trap; all that mashing rates will do is make everyone poorer, especially the poor.

  • The goal is to get you fired (Score:3, Insightful)

    by rsilvergun ( 571051 ) on Tuesday June 14, 2022 @08:49AM (#62617946)
    In the hopes that if you're fired companies will increase productivity with the same workforce and therefore stop raising prices. They're also hoping you'll spend less money because you don't have a job. It's called austerity politics.

    Since the eighties we've been balancing the books on the backs of working Americans. Every time there's an economic problem working Americans are expected to tighten their belts and live worse. Every time there's a problem it's taken out of our hides. And no one ever talks about making the elites who run the show pay for the messes they made. Well nobody except a handful of lefties nobody listens to.

    The solution is actually what we did one last time in the 80s: massive infrastructure spending by the government. That'll resulting new cities and factories being built and will get real productivity gains without mass layoffs.

    But you're not going to get the money from that out of the middle class let alone the poor. You'd have to get it out of the wealthy elites who caused this mess with their mega mergers and they're constant lobbying for political economic advantage.

    And frankly the boomers are still in charge and the last thing they want is anything that would lower their property values and building out infrastructure does that by building new cities. Gen X isn't helping either as they're turning to right-wing austerity politics to protect what little they grabbed before everything went to shit in 2008. Meanwhile Gen M and Z have basically nothing. Nothing except guns. Lots and lots of guns. I'm sure that won't be a problem

    • Re: (Score:3)

      by parker9 ( 60593 )

      Being an Gen X, don't call me right-wing austerity politics. I worked hard for what I got and I sold my house at peak market. Now just waiting until mortgage rates eliminate most people who want to buy a house. I'll get back in and sell again once things turn around. Easy money if you have cash.

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