Fed officials are focused on cooling stubbornly high core inflation, which excludes volatile food and energy prices. Economists see core prices as a better predictor of future inflation than the overall inflation rate.
Rising car prices, strong demand for labor-intensive services and an earlier surge in housing-rental prices have contributed to core inflation.
“Where inflation is proving sticky is in services—getting haircuts, getting your car repaired, buying car insurance,” said Leo Feler, chief economist at Numerator.
Economists estimate that core prices rose 5% in June from a year earlier, compared with 5.3% in May.
The figure is slightly misleading because it’s a measure of year-on-year change in CPI, rather than being a point-in-time measurement, as many assume it to be.
June’s one month CPI increase was 0.2%, coming on the heels of May at 0.1%. The annual rates for May and June respectively are thus 1.2% and 2.5% respectively - significantly lower than the year on year rate would suggest. If we assume the true point in time rate is between 1.2 and 2.5%, then the economy has rapidly cooled.
The strongly inverted yield curve reflects this slowdown and predicts - with some degree of confidence - that the Fed will have to drop rates soon because the slowdown is leading us towards a recession. I find it interesting that the S&P is close to its height prior to the start of last year’s bear market even though the yield curve suggests extreme caution is warranted.
A recession would imply that the interest rate policy has worked. But it would also imply reduced corporate profits and growth, both of which feed into fundamental measures of equity value. This is a nerve wracking time to be invested in stocks.
> recession would imply that the interest rate policy has worked
No, it would not. Price levels and the economy are fundamentally related, but they can and do move separately. Stagflation is one such condition. The Fed is targeting its opposite. Plunging America into a recession would be a clear policy failure.
No views on the stock market here. Just pointing out that rising wages and thus rising spending, with rising production permitting low inflation and a Fed calmly and confidently lowering rates over years while unemployment stays low is achievable.
The main financial drag on the LEI change has since softened [1], as have the new orders component of the ISM index [2] and consumer confidence [3], the main non-financial ones. In line with the trend of June portending better months ahead than did May.
Given we're attempting a novel monetary maneuver--essentially, the opposite of stagflation--I'd widen my error bars on macroeconomic heuristics.
It is incredible to me how few people understand this. Particularly people with finance backgrounds that should know better. The June 2022 CPI showed an increase of over 1.2% (just in June!), equivalent to about 13% inflation at a yearly rate. The last few months have all been in the 0.1%-0.4% range.
Even if you just assume that June 2022 is roughly in-line with March/April/May, that means the June 2022 1.2% falls off the moving average and is replaced with something in the 0.1%-0.4% range. So of course YoY inflation decreases from 4% to 3%. It's just a moving average. Moving averages and YoY numbers make sense to cancel out seasonality and noisy monthly numbers when things are regular. But if there's say, a massive spike in inflation due to supply chain issues, well it's going to take a full year for that spike to disappear from the yearly moving average.
An aggregate figure which can’t ever describe inflation as experienced by individuals is only SLIGHTLY misleading?
It’s like saying we’re all 32 years old or whatever the average age is. You might resoundingly refute the idea that as a 16 year old or a 96 year old that you’re 32. You’d look aghast as someone gaslights you with “yes we all have different ages thats obvious but its the average that matters, so you’re 32 like everyone else”.
But but that’s not the point of ascribing a number to inflation i hear you cry, it’s still a useful construct because it can be compared across countries, it can be compared over time… the model itself can be adjusted to suit particular analysis - RPI, RPI-H, CPI, CPI-H, etc.
… to which i can’t help but yawn. The discipline of macro economics has more in common with astrology than science. The answer to any identified weakness is always “more macro economics”.
Micro economics is often useful though.
Micro = come up with a hypothesis, test it and see if it works.
Macro = tell bamboozling campfire stories with the purpose of claiming power and money away from others without having to fight them for it.
> like saying we’re all 32 years old or whatever the average age is
Yes? This [1] is an important metric if you're running a country?
> yes we all have different ages thats obvious but its the average that matters, so you’re 32 like everyone else
This isn't a parable about a bad metric. It's one about not reading a good metric wrong. The fool in your story misunderstands how averaging works; that doesn't make every average bad or misleading.
> that’s not the point of ascribing a number to inflation i hear you cry, it’s still a useful construct because it can be compared across countries
No, it's useful in its proper context. There are a number of metrics because there are, unsurprisingly, a number of questions people ask about prices. PCE is good if you're setting nationwide monetary policy. It's irrelevant to 99% of the contexts it's quoted in.
I think you misunderstand. The GP comment isn't talking about inflation in general being misleading, but the monthly year-over-year change.
For your analogy, it's perfectly reasonable to say a population's average age is 32. But it gets muddy when you start comparing the rate of change of the rate of change, so if the age was 31 last month people start extrapolating that we'll all age 12 years in the next 12 months.
Not sure if we're calling it too early. Personal savings are half of what they used to be before COVID while personal debt has doubled. It seems like what's keeping this economy afloat is people going into debt and/or dipping into their savings to spend. The job market is red-hot and the money supply is still in the stratosphere compared to pre-COVID. The housing market is a mess for probably the next 10 years as the builders try to catch up with demand. There is really not a lot of great things going right now and I hope the FED has learned it's lesson from the 70/80s when they stopped raising rates too early and the CPI shot up to even higher highs from new lows.
Saying "savings" is wrong, it's not what is reported. It's "saving". "Savings" implies the total sum people have saved. Saving can go down while savings is going up. I could have started 2021 with 0, save $100 in 2021, $50 in 2022. Savings going up, saving going down. You can see the confusion caused below by mis-stating what was reported.
> The housing market is a mess for probably the next 10 years as the builders try to catch up with demand.
The housing market will be a continuous mess while policy is to consider it as a major investment asset, there's no way around that, people buy houses expecting they appreciate in value so they can sell and buy their next, bigger house. That's the dream of almost anyone I know who purchases a house, politicians who implement policies which will cause houses to lose their stratospheric value (at least in major cities across the world) will commit career suicide. There's no incentive to push houses' prices down until most people are completely squeezed out of the market: people get mortgages for a house at value X, any price below X is a loss and so they will fight tooth-and-nail for keeping their assets valued above X... Yes, it's all politics but it's an issue where there's no way out of it that isn't political, some politicians will have to sacrifice themselves, those sacrifices will create a lot of pain to whomever bought an overvalued house at current prices including people going under on their mortgage, selling at a loss, and quite a few will go into financial duress because of it.
Societies need a different housing strategy and policies to support it, the current one where housing is both a major investment asset as well as basic necessity does not work.
I just made a comment that pretty much is aligned with yours. Taking a victory lap on inflation numbers is just silly. There's some serious rot going on atm. We're probably a small disaster away from a really big problem.
"It hasn't happened yet, therefore it can't happen."
Well, yes, we are always at that risk... but even basic numbers are getting much worse. Depending on who you ask, about 37% of Americans (give-or-take) cannot withstand a sudden $400 expense without using debt. This is ~5% higher than it was a year before, in 2021 when it was 32%.
It goes without saying that there is a finite ceiling for how much debt a person can obtain. When 1/3 of the country risks hitting that ceiling with how debt use has increased, is unable to get more debt, and can't afford $400; you have a perfect recipe for extreme social unrest in the future if things don't turn around. It's made worse by inflation eating away at pay, and also the record-high APRs that credit cards are demanding; and high rates in general for debt of any kind.
In 2013, there was no Ukraininian war, and China and Japan willing to hold huge chunk of American bonds to allow financing of Afghan-Iraq wars. There is no brics too with cryptocurrencies/digital negligible on the far far fringe. Today, American concluded Afghan and Iraq wars with humiliation defeat. Entire "war investments" didn't yielded a single embassy over there let alone the fable 3T$ mining rights of lithium there. Chinese now actively pursuing space explorations and photonic chips while US losing tons of bright Indian+Chinese scholars coming over. Plus, in terms of poor people and population growth, there are more today than 2013. Plus Siberia is thawing making Russia now more hospitalable than Bush time. Non of American hypersonic missiles operational while Russian and Chinese are in the process of changing all their nuke missiles to newer missiles. American Patriots and Thaad are widely jokes in military industries. And the greatest kicker is in the east for centuries there are prophecies of American destructions from possibily nukes. Even John Titor in the early Bush era or late Clinton era hinted his timeline USA nuked by Russia and China. With current Biden and woke cultures permeating entire USA, those kind of economic numbers would force American governments to do very stupid thing since lacking room to manuerve. It's canary, but dead or alive, miners dont care.
This kind of spin is part of the reelection efforts of a specific person and their party. I'm not surprised to see water-carrying and, frankly, propaganda here on HN about inflation.
It appears it's trending up from a local bottom last year, but it's still lower than most of the past decade before Covid. Also this number isn't on a per-capita basis.
> Personal savings are half of what they used to be before COVID while personal debt has doubled.
And assume you're saying that the average person has half as much money in the bank as they did before COVID. Your data don't support that assertion--they show that people are still saving money, just at a slower rate. Wouldn't that imply that people have more money in the bank than pre-COVID?
Anyway, spending (rather than saving) money during a period of high inflation is textbook "rational consumer" behavior, and is hardly evidence of a horrible, terrible, no good, very bad economy.
The next few months will show low CPI on a MoM basis due to "base effects" of pandemic spending starting to ebb. Prices swung too far too fast on the upside, especially in rents. We see concurrent rent data declining over the past few months, but it has started to rebound more recently.
However, structurally inflation is likely to resurge on a MoM basis later in the year. The labor market is tighter than ever before and wages are rising at 5-6% annualized. Oil looks set to rebound, as a lot of the decline was due to recession betting and US SPR releases distorting supply (which are still happening, but obviously can't go on forever).
Inflation will only go away structurally once a recession ultimately hits. Very unlikely that it stays around 2% with markets, bonds, commodities rallying alongside 6%+ wage gains. The cycle length depends on whether the Fed decides to see through nominally lower numbers. If not, will be similar to the 70s/80s false troughs and re-steepening in inflation.
The rate on bonds only matters relative to the rate of inflation. Bond yields below inflation (in aggregate in the longer term), are stimulative, regardless of the nominal level.
Financial conditions have been easing over the last few months, not tightening. Fed hikes only impact the short end. Long end is market based
The structural, hard data has foretold the path of inflation over the past 3 years with a high level of accuracy. Ignore the noise/headlines and you'll have a pretty clear view of the state of the economy. People who bet on sentiment and not the actual data have been wrong... though sentiment can drive real data to a certain extent, of course
Currently 80% long with cost basis mostly around last October/SVB lows in primarily REITs and financials/lenders. Market will likely rally over next few months (smaller caps), until the reality sets in on sticky inflation. If Fed sees through the short-term data and signals this, then market will pull back soon, otherwise will happen later in the year.
Inflation falling back to 2% and staying there with 6% wage gains and rallying markets/commodities is a fantasy. A quite obvious one to predict, yes, if you study the history of monetary policy for more than a few minutes.
There is always the possibility of a trapdoor recession though. By some measures household accumulated savings are close to depleting, student loans resuming... and consumer credit measures are looking weaker. We have a stimulus impulse thats fading competing against a structurally strong economy. Which one will win in the end?
If the signs start pointing in that direction, then it will be time to pivot to a recession trade. You just have to be there first
You had one question in your comment which I answered, whether rhetorical or not.
Saying "we can have a soft landing" with no context or supporting reasoning isn't really saying anything at all. History shows only really 1 instance of a "soft landing", and the economy was less overheated and policy much more proactive back then. Back then the Fed actually tried to move ahead of inflation by assessing structural tightness... not reactive based on CPI
You are correct that the decline is exaggerated by base effects; but it's also true that there has been a fairly steady decline last few quarters (disinflation)
The first line of my original comment states that MoM CPI will be low over the next few months, in my opinion from factors that will ultimately be fleeting. So you seem to be having a conversation with yourself that is unrelated to my original post.
MoM inflation on its own doesn't tell you anything about structural inflation. MoM fell many times in the 70s/80s only to rebound later due to overly optimistic policy makers assuming a downward trajectory would be sustained without further action from them. It's effectively the exact same situation we're in now... only question is whether the Fed chooses to repeat that path or not
Well, this is good news. Rate rises might slow, but I wouldn't expect them to come down all that quickly based on our last fight with inflation in the 1980s. The era of zero interest rates are probably over for good. That's probably a good thing, but VCs won't be playing nearly as fast and loose with funding as they were over the past decade.
If the market thought interest rates were never going back down, then the 30-year rate would be higher than the 1-year rate.
The bond market isn't always right, but it's usually closer to the truth than some random speculator on the Internet (wisdom of the crowd, and all).
A simple bit of reasoning with the Federal government being in debt $33T - means that if rates were to forever stay this high - their interest burden would be AT LEAST $1.75T per year.
Current Federal tax receipts (minus payroll taxes) is $1.93T.
Either Federal Tax rates are going to ~75%, the government stops doing anything beside servicing debt, we default on our debt, or short-term Interest Rates eventually go back to ~0%.
> If the market thought interest rates were never going back down, then the 30-year rate would be higher than the 1-year rate
The yield curve has materially revised its long-term rate expectations over the last months [1]. The 30Y at 4% seems compatible with rates not "com[ing] down all that quickly."
> the Federal government being in debt $33T
It's closer to $18tn if we exclude debt held by the government itself [2]. (It still needs to be paid, but monetizing that debt is neutral from a cash flow perspective.) So about $1bn of interest payments per year to the public, which, assuming 2% inflation, is about $570bn today ten years out.
I'm not a bond-pricing wizard, but if for N years, you expect short-term rates to be higher than long-term rates, that has to get priced into the long-term spread (putting it above the normal spread over the short-term durations).
This absolutely does not mean the market expects short-term rates of ~4% indefinitely.
> spread on the 30-year is usually ~2.5% higher than short-term rates
250 bps is a high but precedented spread for the 30Y [1]. We're definitely in an inverted environment. Nothing in the curve suggests the market expects rates to stay high indefinitely. But they also do not portend any proximate massive cuts.
Or we let inflation eat away the debt, turkey style.
But for real I agree in general - where is the money going to come from? The interest on the debt and the federal receipts don’t work! I see the ratio (linked below) hitting 0.5 this decade.
What’s crazier is that % of GDP taxed according to the FRED is at historically normal levels dating back to 1950 - we’re not even at a point of low taxation relative to output.
> Or we let inflation eat away the debt, turkey style.
We kinda tried that in Italy in the '70s/'80s. Spoiler: it didn't work. Globalized money markets can be assumed to be more reactive than public policy pretty much all the time now, so they will keep raising interest rates faster than governments can handle, more-than-countering expected inflation and making the debt spiral eventually unbearable.
Even Keynes expected to pay back (some) debts when the economy does well.
Federal receipts as a percentage of GDP may be within historical norms but the population pyramid is not. The baby boomers' retirement will have to be paid for somehow: either through benefit cuts, higher taxes on the working, or more debt.
I totally agree, something has to budge. That's one of the reasons I bought a house in a cheaper area close to family and am trying to save money, but really what can one even do to prepare for this?
Mass monetary creation and a higher tax burden are guaranteed. Spend less and hold assets? Work in healthcare?
> The era of zero interest rates are probably over for good.
The ZIRP policies held for ~12 years probably created a lot of malinvestment due to kicking-the-can-down-the-road financing which will need to get cleared out in the next recession, when that recession hits, the Fed will slash rates again.
Nothing really fundamental has changed in the way the Fed operates, and it still has its 2% inflation target. They just increased rates at what was a pretty breakneck pace and are talking foldly of Volker. This isn't the post-WWII Fed that let inflation get up to 10% in the 70s. Most of the effects of inflation and rates were due to shocks caused by the pandemic, which are over now. I don't see why people think that inflation or rates have fundamentally changed.
Powell has said the Fed plans to hold rates. We’ll likely see one last increase this month, before a flat-lining and then an eventual cut. I wouldn’t expect the cut(s) to be substantial unless demand falls off a cliff.
I’ve been using that tool for over a year now and it absolutely will show what Powell will do. The odds will change as information enters the market but in general it’s spot on.
> I’ve been using that tool for over a year now and it absolutely will show what Powell will do.
>The odds will change as information enters the market but in general it’s spot on.
Sounds more like “it absolutely will show what Powell might do”. Also, Powell does not do it single handedly, there are 12 members on the Federal Open Market Committee that vote on setting the interest rate policy.
I know there are other members of the committee it’s just a colloquialism I suppose. And yeah, I thought about saying it “will absolutely show” but my inner economist said “it depends” because there could be a surprise (even though it’d be absolute madness).
Except that in areas where people actually live, higher rates haven't done much to lower those "low rate" prices.
There is an insane supply problem and the fed's hand in the mortgage market doesn't make anything better. It's sensible for mortgages to all be ARMs, then rates will actually have a very real and unavoidable impact on home values.
We are now going to be stuck with this before covid and after covid homeowner situation. People who bought prior to 2022, and especially prior to 2020 will be death gripping their 2% mortgage, to the point that you could basically write off that parcel of land as even existing for the next 20-25 years.
Also, except for Miami every major city has had price decreases, so your personal anecdote is not what the stats show.
And in fact, at 10% inflation, if prices don’t rise, that means they are getting 10% cheaper in real terms. So in fact prices definitely are falling, no city has had a 10% price rise in the last 12-18 months.
by living in the hood or in MAGA country you are paying the same price, its just taken out of your wealth in different ways. The market is pricing things appropriately.
There is something that is scaring people away from living in those areas. the market does not care about your political views. You can deny reality all you want.
You can get much less house for the same monthly mortgage payment now then you could before rates went up. The small decline in home prices doesn't offset the much higher monthly payment you have to pay now. People are constrained by how much they can afford to pay every month, not the overall amount they have to borrow.
You can expect house prices to continue to rise given the money printing and where it ended up during COVID. A lot of rich people need somewhere to put their increases in wealth post COVID, my guess is a boom for about 2-3 years before big problems and they might not need the size of mortgage to get a decent return that the interest rate matters all that much.
As someone who's studied economics, predicting interest rates in the long run is fairly straight forward. It's the short term movements that are impossible. I base my statements on historical fed moves in a similar environment, but I'm not paul volcker
I've also studied finance and economics, like in university and everything, though not to any great extent. I came away from the experience thinking that it might have a bit more predictive power than reading chicken entrails.
What long term predictions from the past accurately tell you today's rates? That is do you have any back testing?
Long term (>9 months), yes. Medium term (3-6 months) predictions of medium precision is entirely reasonable given the size of the economy (like steering/stopping a container ship) as long as your cite your assumption that no black swan event will occur.
> Why is it good for rates to come down: financing mortgages/cars/etc. comes down
Not necessarily, it depends on the principal cost as well. If principal costs increase in tandem with rate declines, the financed cost doesn’t necessarily change.
You’re missing the inputs into rates rather than the outputs from rates.
Rates mathematically represent the value of a dollar available today versus a dollar available in N years.
If we were to find capital intensive, large scale, low assessed risk, economically productive ventures tomorrow, we would expect rates to rise ceteris paribus as the dollars necessary for those ventures would compete with bonds for investment dollars today.
For example wide spread nuclear fusion, or some kind of rail infrastructure, etc.
In that sense secular declines in rates represent a society that has decided it has reached diminishing returns on capital, at least on a risk adjusted basis.
Similarly rates embed a consideration for default risk, or in the case of a bond denominated by the issuer currency risk. In this sense rates going up is bad.
There’s also the sheer debt and deficits governments run. Higher rates imply higher costs for both.
Which situation you want probably starts to encroach on your political leanings, subject to a few parameters.
Every prediction has error bars, some error bars are smaller than others. I wouldn’t be so quick to throw my hands up.
For example, the yield curve inversion has had quite good predictive ability so far, and it’s predicting a recession. If you buy the fed’s data driven approach, that means its predicting rate decreases.
In that case the long term bond market’s prediction is supported more strongly than the fed’s prediction.
Pretty much agreed. However, I think there's a huge jump between yield curve predicting a recession (very well founded) and yield curve predicting rates will never come down again, or specifically, that they won't go to zero again (not well founded IMO).
These numbers are borderline meaningless for the average American. Economists, wall street, and financial news pundits can go back and forth all they want, the average person is most definitely feeling a massive crunch and a percentage number isn't going to explain away the rot building underneath the floor. IMO, the big elephant in the room is household debt - people are extremely leveraged, and inflation data doesn't illustrate this. Inflation #s to me is a political chip that administrations on both sides use for finger pointing.
I think it's something beyond just this. Inflation, especially how it's being used today, increasingly feels like a metric almost as pointless as GDP. Because what people, laymen and expert alike, refer to when they speak of inflation is all driven by a focus on what really matters - prices. Obviously the rate of change of prices, inflation, is extremely important but only as a means of gaining insight into the prices themselves.
But now inflation is being considered as a metric of priority, by itself - which distorts its purpose (akin to what happened to GDP). And we're in a perfect illustration of why. Prices have dramatically increased, but now that they're continuing to increase beyond this at a rate of change is "only" 50% higher than the desired rate of change the Fed was aiming for, back when prices were lower, you have some people ready to unfurl "Mission Accomplished" banners. Clearly, the metric has become more important than the meaning, again like GDP.
Gallup maintains an active economic impressions survey here [1], and currently we're at lows matched only during the housing market crash in terms of economic confidence. And I've no doubt this is playing into it. From the perspective of people continuing to pay intolerably high prices for effectively everything, seeing economists cheer about this is going to look alot like the 'this is fine' meme to basically everybody on the outside.
People don't call out government competency nearly enough. Remember the Silicon Valley/First Republic catastrophe a few months ago? Contagion was fully contained, confidence restored, inflation is nearly on target with employment remaining rock solid. I wouldn't put it as pat "Biden did it", but Biden did everything in his power correctly, the Fed was fully vindicated, the bureaucrats at the FDIC did everything right, Congress did, uh, nothing wrong? It's a banner year for good government.
And, the same could be said for other "entities" or "infrastructure", that, when things are fine no kudos; or worse, complaints asking "Why do we have X?", but then whining when something is not in place. :-)
If you're a football fan, the offensive line only gets called out when they screw up even though they're probably the most critical function of an offense.
Execution so far has been good - on a real basis, the US economy is on pre-covid trend despite lockdowns, inflation, a war in Europe, etc. If the Fed actually navigates us into a soft landing, it will probably be the greatest achievement in the history of modern economic management (maybe along with the Marshall Plan)
Employment-population ratio is now higher than pre-pandemic. For prime age population, it's now less than 1 point below the all-time high in 2000. And the silicon valley layoffs seem to have run their course.
- wasn't the instability for banks also partly caused by the sharp changes in interest rates, and perhaps for that reason should have been predicted rather than just reacted to?
- didn't we also learn that not only were these banks not required to participate in stress-testing, but that the recent stress tests hadn't exercised the kind of scenario that the Fed has been creating?
- it seems like a substantial portion of inflation was triggered by excessively generous government programs like PPP which gave a bunch of money to businesses that weren't even impacted
- reaction to inflation was kinda late, and Powell gave repeated claims that it was transitory
So ... is cleaning up messes (or preventing the spread of messes) that government created a sign of competence in government?
> is cleaning up messes (or preventing the spread of messes) that government created a sign of competence in government?
Without irony, yes. Ideally we would like governments not to create messes. But we can’t prevent that, and even if we could, messes will be created by other entities and other governments.
Case in point, you mention the PPP loans, which were signed into law by a previous administration. Today with a new administration and a new situation, it doesn’t make sense to complain too hard about that. We should point it out the next time PPP-like loans are suggested, but we shouldn’t chide the current government for cleaning up a mess of its own making, because that’s really not what happened here.
So yes, governments that are good at cleaning up messes are competent governments. Ideally they should also be good at not making messes, but the us government is an incredibly large entity, so messes are going to happen.
> Case in point, you mention the PPP loans, which were signed into law by a previous administration.
The CARES act passed 96-0 in the Senate, and in the House was an overwhelming voice-vote. The large majority the house members and senators which voted for it are still in office, and Biden signed the PPP extension act of 2021. To pretend that this was a choice made by people no longer in government seems misleading.
> Today with a new administration and a new situation, it doesn’t make sense to complain too hard about that. We should point it out the next time PPP-like loans are suggested ...
Because a large majority were forgiven, these were mostly effectively grants, not loans. And after a bunch of people take your money, of course it's to their benefit if we all stop talking about that fact. But I don't think this is any more appropriate here than if a mugger tells you that their misdeeds are in the past and you should just move on and focus on other things despite the fact that they still have your wallet.
> So yes, governments that are good at cleaning up messes are competent governments. Ideally they should also be good at not making messes, but the us government is an incredibly large entity, so messes are going to happen.
I don't think this is more convincing than when a large tech service has a major outage and their ops team is competent in investigating and resolving the incident -- but that fact doesn't on its own mean that the organization is especially competent.
> To pretend that this was a choice made by people no longer in government seems misleading.
I mean... it literally is though. You're quibbling around the margins about how there was a degree of holdover from one government to the next, which of course there always is. But it was in fact a new government, and you don't disagree.
I chose the PPP example because it's recent, not to mislead. The HN guidelines implore you to be charitable in your interpretations.
But these banks didn't fail enough, >250k depositors should have been part of the bail in but they were not, and the banks were treated as systemically important even tho they were not held to the systemically important bank requirements before.
FDIC/FED/Treasury perhaps did the best thing now, but it's still because of a previous mistake.
Many people feel the opposite of you that the Silicon Valley first republic fiasco ended up with those who chose to risk more than the rules said they would (FDIC insured amount) got bailed out for their poor decisions and risk taking, while many ordinary people are increasingly feeling that the system is stacked against them and because of the huge inflation (that they don't see matching the government figures because the government is playing funny with the numbers) is putting them financially back.
I'm not saying your wrong, but there are a lot of people who see it differently, and I also don't think that "the smooth running of the financial system" is the most important responsibility of the government.
I also don't think that "the smooth running of the financial system" is the most important responsibility
Anyone old enough to live through the financial institutions collapsing, one after another, like dominoes would probably at least concede that it is an important responsibility. No one likes to see those responsible get rewarded for their actions, but it sure is important to not let the patient bleed out on the table.
The way many people remember it is millions lost their homes and livelihood while the bankers who had made billions in bad loans got golden parachutes and bailed out, at the same time most people were wondering how they were going to eat.
Honestly, things would've been rough, but I think they would've been better if we would've let the economy and the extra waste it has bleed like a stuck pig.
Honestly, I was thinking older than that, like the S&L crisis in the 80s. What I remember most from the crash you referenced is that the Dodd–Frank regulations getting rolled back not long after. An ounce of prevention, ya know.
Some people wouldn’t mind if the economy is plunged into recession if it means some rich people get theirs. These misanthropes pop up during every financial or possible financial crisis.
I mean, yeah, but they only serve as a response to the “let them eat cake” class, who always ends up getting their way in the end. The real misanthropes are the ones who keep the status quo primed for the next financial catastrophe by not fixing anything when things are good, because financial catastrophes are profitable for them.
> The real misanthropes are the ones who keep the status quo primed for the next financial catastrophe by not fixing anything when things are good, because financial catastrophes are profitable for them.
Who are these people? This describes a small number of people and they are not in power.
The individuals in the role of Speaker of the house, senate majority leader, and POTUS over the last 30 years. I wasn’t expecting to provide a list, as you didn’t list the individuals you were referencing, but if you want specific names I can get those.
The only person among those who conceivably see any upside from recession are congressional leaders who are not in the President’s party. Fortunately, they do not control the FDIC and Fed in exigent circumstances.
Upper echelons of government definitely benefit from maintaining the status quo order. Mitch McConnell and Nancy Pelosi being in power for years and years and years doesn't happen on accident. That's what happens when entrenched power structures do whatever they can to stay entrenched. If that means letting the economy blow up every few years, fine. No skin off their backs, they're at the top of the pyramid. Why should any of them fix anything when things are good?
It's demoralizing when the government can move with lightning reflexes to protect corporations or rich individuals that are "at risk", meanwhile many things which would directly benefit working class people get kicked down the road.
Because everyone with a voice (those not at the bottom) are interested in maintaining the social ordering. That is why businesses get saved, but workers do not. You want the people dependent on their wages to not have too many options, otherwise you end up with costs for goods and services increasing (quicker than anticipated), since the lowest wage workers have more options.
The volatility can cause political blowback as people’s expectations are not met.
> they don't see matching the government figures because the government is playing funny with the numbers
This isn't seeing things differently, it's seeing them incorrectly. Yes, there are zip codes and metropolitan areas with higher than median inflation, but that's also true for the reverse. Someone missing the forest for the trees isn't seeing things differently, they're misattributing their problems.
> It’s about funny numbers and bailing out the rich
The first is ambiguous; I assume this is the usual inflation definition misunderstanding. TL; DR There are a number of measures of inflation because there are an infinite number of possible baskets of goods and services; they're adversarially generated by a number of agencies and private organizations.
The second is just sour grapes. Did SVB's depositors deserve a bailout? No. Was its bailout infinitely better than the '08 bailouts, which bailed out the banks themselves? Yes. Was not bailing out SVB's depositors worth a recession? No. As another comment mentioned [1], misanthropy and catastrophism isn't a productive policy preference.
Sure, it's great that they cleaned up the SVB mess quickly and decisively. But it was also irresponsible for the Fed to raise rates so quickly that it put massive banks in danger of insolvency. They understand how bond pricing works, and they understand that banks are heavily invested in t-bills. SVB was a predictable situation that could have been prevented through slower rate increases.
Since we don't live in the timeline where rate increases were less aggressive, we don't know exactly how the economy would have reacted. But seeing as inflation was largely attributed to lack of supply and buyers' willingness to pay higher prices (see: corporate profits rising), I think it's safe to think inflation would have come under control if rates hikes were less aggressive.
After I posted I remembered I knew that, yea that definitely helped! But some of the fault is on the banks as well for not managing interest rate risks well. As Matt Levine pointed out, they haven't had to worry for a decade! SVB's liabilities were also highly concentrated among large uninsured by FDIC accounts that all moved in tandem which didn't help anything.
I mostly agree, but there were lots of signs the fed ignored and waited too long, and had to do large and sudden hikes. It could have all been less abrupt. They still have done a very good job so far, and it could have been very different.
> but there were lots of signs the fed ignored and waited too long, and had to do large and sudden hikes. It could have all been less abrupt.
I disagree. Yes, there were inflation signs that they didn’t act on, but that’s because the exceptionally sharp and deep recession being over and securely so in unprecedented time wasn’t clear except in retrospect. Fed policy isn’t driven by a unitary mandate.
Calling bonds a bad gamble is questionable. The Fed rate goes up, the price of bonds at the old rate goes down, a minor bank run forces them to sell the bonds at a loss to cover the withdrawals.
Were they supposed to invest in stocks, options, or real estate instead? The answer is complicated, but calling bonds a "bad gamble" is weird
Protecting banks at all is not part of the Fed’s monetary policy mandate, so the “bag gambles” was surplus verbiage, ultimately.
Price stability and employment are; protecting banks from failure is a non-goal except insofar as it might instrumentally serve the actual dual mandate goals, and there are mechanisms in place to protect the economy from bank failure impacts, and if the people responsible for them (which include the Fed, but in a supporting rather than leading role, abd outside of monetary policy) are on the ball, the impact of such failures on the things that are in the monetary policy mandate are minimal.
They were supposed to invest in short term bonds instead of long term at the very least. If SVB had one year maturity dated bonds instead of 10 years they'd be fine today.
No, it was irresponsible for banks to shove so much money into long term fixed rate bonds when they should've known inflation was likely in the wake of covid. They surely knew that inflation will lead to the fed raising rates and that raising rates lowers the value of bonds, nothing here should've been unexpected at all.
> But it was also irresponsible for the Fed to raise rates so quickly that it put massive banks in danger of insolvency.
It was also irresponsible of them to have the rates near zero in the first place. It's one huge whiplash, and the low before the high is all part of it.
Government yes. But this has nothing to do with politics. The more I study the economy the less effect I see the president or congress having much direct effect on the economy (good or bad). The Fed sure, but not so much elected officials.
I'm not sure I'd disagree, but I think that's actually an interesting feature of government when it's not going overboard with bad policies things tend to be "sane" and the system just functions.
Once we get idealogues or charlatans or just outright corrupt people in positions of power, you'll find out very quickly that politics has a lot to do with the economy as it comes crashing down all around us.
That being said, the president and Congress do have some levers to pull to effect the economy. That can be anything from bad transportation policy (like the overbearing federal highway system) which lowers entrepreneurship and increases death rates and obesity (less fit workers, fewer businesses, etc.) to seemingly good policy like the Inflation Reduction Act which is building and repairing infrastructure, etc.
While most assumed nothing would come of it, the hostage taking of the debt ceiling specifically whenever a Democrat is president is another way in which Congress can have a direct effect on the economy.
> more I study the economy the less effect I see the president or congress having much direct effect on the economy
Biden kept Powell and resisted calls to politicize the Fed. Contrast that with e.g. Latin America. It's absolutely credible to comment favorably on the American political system in this one respect.
In general, competency is ignored and failures get highlighted.
Why in organizations without rewards for big wins, the correct course of action is often to do nothing because the penalty for failure is always there.
Way too early for that victory lap. It takes 6-12 months for interest rate rises to hit the economy apparently. There is a long way to run yet before anyone knows if it was the right strategy.
I also think avoiding the gyrations in the first place might have been a better outcome.
That’s a nice viewpoint and I’m happy for the outcome. The cynic (sometimes me) would say we just maintained the status quo and managed to stave off a wider collapse due to a society fundamentally built on unsustainable growth.
The premise that market expectations about growth are unsustainable does not equate to wishing for catastrophe.
Upon successfully mitigating a forest fire, the conclusion that conditions are ripe for more forest fires does not equate to wishing for more forest fires.
> premise that market expectations about growth are unsustainable
Fair enough. Rising rates make a stable state more viable. In a very real sense, that's what rates are: patience in terms of money. We're conditioned to thinking of all markets like tech, but most businesses happily chug along growing alongside the economy while spitting out wages and profits. Amidst all of that, the carbon and material intensity of advanced economies keeps falling, alongside their birth rates. Fundamentally, I don't see what's forcing unsustainaibilty to the point of necessitating collapse.
Glib as it may be I do love the quote from Keynes that "in the long run we're all dead". Did Fed policy buy a few more quarters of price stability between now and the heat death of the universe? Sure. But that's as much as anyone can do.
I'd give them more credit for digging us out of the hole, but I think having the Fed rate near 0% for so long created most of problems in the first place. That started well before the current or previous administration.
(I know we're supposed to make a distinction between the Fed and the Gov, but I don't really)
Your point on FDIC is well taken though. That worked as intended and maintains my faith in the banking system.
> I'd give them more credit for digging us out of the hole, but I think having the Fed rate near 0% for so long created most of problems in the first place
If by “problems” you mean the strong rapid recovery from the sharpest recession in quite a while, yes, Fed policy (and rare strong fiscal policy response) contributed to that, but, so that’s actually a good thing.
Things don't have to be just STOP!!! or just GO!!! Hindsight is 20/20, but a little more moderation along the way might have been a good thing.
And yeah, recovering from a recession is good, but the crazy positive stock market growth after recovering, in a country that isn't really growing it's production or population, should tell you that a comeuppance was on the horizon.
btw: That "If by X you mean Y" type of statement... It's snarky and sarcastic. I wish people could just talk without being jerks.
Btw: using “btw” to point out an obvious and obviously intentional feature of the lost you are responding to is snarky and sarcastic, which is hypocritical in a plea against snarky sarcasm.
You are free to respond or not as you wish, but you aren’t important enough for me to take the steps that would be necessary to remember this request and who made it (if it was 1990s usenet, I could just drop you in a killfile, but alas, “progress” isn’t always all its cracked up to be.)
Not exactly -- it was left to the judiciary to end the unconstitutional and inflationary student loan repayment pause. Otherwise, yes, pretty good state of affairs by the executive.
As an aside here, it's not the federal loans that are an issue, but the federal protections against all student loan dismissal that's the problem. It gives lenders a major incentive for reckless lending. Lenders aren't as motivated to ensure the success of those they lend to, because in the worst case scenario they have essentially have a lien on people themselves. And the later it's called in, the higher the cost will be.
In a world without these protections the interests of student loan lenders and students would be strongly aligned. And the greater restraint in lending would also likely drive down education costs, as well as help push students from poor families more towards majors that can help them become successful adults - a push those students might not otherwise get from their families or even school councilors.
As for where the now literally trillions of dollars of lending is having an impact on inflation, it'd depend on what that money was doing beforehand and what it would have done if not lent. Inflation comes down to monetary velocity, which is largely (though not inherently) driven by monetary supply. If trillions of dollars in student loans are increasing these factors then it will drive inflation, the only question being to what degree.
What fraction of student loans are not done under federal guarantee programs? Again the numbers don't add up here.
The complaint that lender incentives are broken with guaranteed loans is true enough, but it's not remotely a new effect. These banks have been issuing high risk loans (students almost literally can't fail to qualify) for decades without being an inflation driver. Arguing that they are now, just because it confirms your priors about a (now receding) burst of transient inflation is magical thinking.
There were some pretty recent multiplicative exponential effects going on. You had education costs increasing far faster than inflation, an increasing number of people obtaining degrees, and an increasing chunk of people obtaining degrees unlikely to meaningfully contribute to their ability to make good on those loans. This caused total debt figures to increase at an exponential rate.
You can see the data quite clearly here [1]. I do wish the data went further back, but it's clear enough as is. In 2006 the total debt from student loans was less than $500 billion. Today it's $1.7 trillion. That's a huge chunk of money which is going to have meaningful economic effects. On the plus side, the numbers have finally slowed but it remains to be seen if that was just an effect of COVID.
> In 2006 the total debt from student loans was less than $500 billion. Today it's $1.7 trillion. That's a huge chunk of money which is going to have meaningful economic effects.
"Meaningful" seems irrefutablely vague, but certainly not "significant". The numbers you point may look big as single sums, but they come out to ~$70B of spending per year. That's noise. It's absolutely not causing "inflation".
Also the numbers fail to show the "recent multiplicative exponential effects" at all. The slope of that curve has been dropping (because of covid, obviously). We issued fewer loans in 2020-22 than we did previously!
Again, it doesn't work. Your conclusion is wrong. You need to revisit your priors about why you're so sure about inflation and student loan assistance.
Quoting myself back at the beginning, to avoid needless repetition:
"As for where the now literally trillions of dollars of lending is having an impact on inflation, it'd depend on what that money was doing beforehand and what it would have done if not lent. Inflation comes down to monetary velocity, which is largely (though not inherently) driven by monetary supply. If trillions of dollars in student loans are increasing these factors then it will drive inflation, the only question being to what degree."
What I was alluding to there is that lending tends to increase both monetary velocity, and the monetary supply. This is what makes lending so much different than normal spending.
You can clearly see it rocket upwards in 2020 due to the all the covid assistance (of which student loan forbearance was one item), and then begin to fall as the inflation stabilizes. The crest of the peak is six trillion dollars higher than the pre-pandemic starting point.
Sorry, but a mere $70B loan program just doesn't figure in that enormous signal. It doesn't. It's not doing what you think it's doing. I'm begging you to take off the political/ideological glasses and look at the real numbers here.
A $70B loan program would have small, though measurable, effect on the economy. The issue is that those loans are not just being given to people who cannot repay them, resulting in a wide array of accumulating economic issues. So we're not looking at the impact of one small event, but an avalanche in slow motion now amounting a $1.8 trillion one.
As one other aside, inflation doesn't drive monetary supply. It's the other way around.
Keeping a pause on them and trying to cancel a significant portion of debt while inflation was high just to buy votes? The media should have absolutely ripped into him on that. It certainly didn't help.
Despite the headline of the large price tag, the money is question was debt. It was not money added to the market. It was money that would not be removed for the subsequent 10-20 years. It's highly unlikely that's driving any short term effects aside from a marginal bit of fiscal relief for middle class white collar people.
It's also a far smaller price tag than the regressive tax cuts of 6 years ago and far less egregious than the previous president threatening the independence of the Fed if they didn't push rates below zero.
I'm glad i'm not the only one who had a jaw drop moment this year. I wonder how many con goers will be surprised when they show up with only $360 dollars this year. I was shocked at 300$ since I was used to the cheap cheap prices of CCC.
This was definitely a mild report, but that headline YoY number is being pulled down by base effects with June 2022. July will reverse that effect, so it will look high in comparison
this is really good but let’s not celebrate til the battles over and it’s sustainably back to 2%. well see how it all shakes out in 18 months as a lot of fed tightening is delayed in effects
i think everyone needs to do some reflecting. i certainly need to reconcile why i was so sure that the economy would have to crash from high interest rates in order to stop inflation
one camp seems to want to take credit for inflation falling but ignore the incompetence of it rising in the first place
the second seems to want pretend it’s not coming down when it clearly is.
imo 2 things are undeniable:
1. both transitory (pandemic) and policy errors (overzealous spending and interest rates) caused it in first place.
2. both transitory (base effects of pandemic going away) and policy successes (fed raising rates and congress stopping socialist spending) are causing it to come down
When it comes to the global economy, it’s basically true. Only the US and China, and to a lesser extent Europe collectively, really matter - everyone else follows.
Wanting someone else doesn’t mean they didn’t keep Powell, which in fact they ended up doing. It also doesn’t mean she would have done a worse job. She could have done better, we will never know.
Why not both? Biden certainly isn't urging the Fed to continue cutting rates despite a strong economy, while also cutting taxes increasing monetary velocity, during a time of increased monetary velocity due to COVID stimulus funds to keep things running.
anything biden did (between 3 and 5 trillion extra), was after and on top of trumps spending.
so if trumps 2.2 was bad, what do you think supercharging that was?
it’s like i filled a bathtub 80% and left. and then you come and add 120% of its capacity and overflow it. Then blame me for filling 80%
and btw the context in 2020 was differnt, we had to act and we were unsure about pandemic. biden’s spending was after we had a vaccine and knew the extent
I’m sorry when did this inflation thing start again?
I’m not a trump fan, and he spent like crazy too, but Biden was next level. Stimulus after stimulus and actual helicopter money. And it was under his time that the fed decided inflation was “transitory”.
Trump was using his bully pulpit to push the Fed to keep rates very low to drive stock market investment (which Trump and by extension his administration used as an improper measure of a strong domestic economy) and a red hot economy. That, coupled with the insanity of COVID on world-wide markets, helped to fuel even more inflation now.
Being that we have more traditional politicians in power, they aren't pushing the Fed to keep rates low and allowing them to do their job in bringing the market back under control.
The problem is that while inflation, aside from COVID, didn't happen under the Trump Administration, his public commentary and public policy have very likely driven more inflationary effect today. That's not a question nor a surprise.
The NYT used to be one of my favorite news sources. After their cheer leading for invading Iraq I started to change my mind.
Fast forward to today, their whole reason to exist now seems to promote pro war democratic politicians and to lie and slander anyone who is anti war or critical of big pharma. Their hit piece on Kennedy's wife Cheryl Hines was shameful.
EDIT: my point here is that they want to make the Biden administration look as good as possible.
I want to era of Walter Cronkite back.
To be fair, the NYT’s war mongering is fairly constant. That is just my opinion, which does not matter really, but it is my honest opinion. Our endless wars kill too many innocent people. I love my country, but I wish we would change our collective behavior on the constant war thing.
Obviously there's a lot going on here, but one major factor is going to be discounting future earnings. Lower inflation means lower interest rates which means that the present value of future money is higher.
So, in other words, growth is more valuable when rates are expected to be lower.
We do not want deflation, particularly in an economy where the average household debt has increased significantly. -3% means that the real value of all this debt that has been accrued over the past few years is increasing at higher rate - not only are you paying interest, but every dollar paid is worth more and more as deflation occurs. If you're hoping for a recession for whatever reason, I guess you could demand deflation, but for the rest of us, we just want inflation to slow down.
The goal is to keep inflation at a low enough rate that wages keep up.
But they haven't have they? Median earnings are flat with Q4-2019 levels. Averages are higher because those of us fortunate enough to work in tech or healthcare are experiencing boom times, but for huge swaths of the country, things are looking very bleak. Take-home pay is the same, but the price of groceries and rent has continued to climb without abatement.
Sure - it's a multi-part issue. Deflation is just as bad when wages are flat, though, or even worse. The real value of all this debt Americans have accrued would still be increasing while wages are flat. Deflation also means that businesses are less likely to increase wages - all their debt is in the same boat, and they can argue that by keeping pay the same in a deflationary environment that people are getting de facto pay raises.
Obviously wages being flat isn't good when there is inflation, either - if they don't keep up you end up needing more debt because you can't afford to pay for everything out of your regular wages.
We're barely scratching the surface here, but modern economies have a lot of different cogs that really only turn properly in an inflationary environment. It just needs to be a lot less inflationary than it has been.
There is just about nothing worse than deflation in a modern economy. It causes lending and discretionary spending to completely seize up which practically guarantees a recession.
Computers have been deflationary since their inception (you can get a better computer for the same money if you wait a year) but people will always value the present more then the future, that's why we've been buying computers regardless. The same principle could apply in theory to other asset classes, you want a house now even though you could get a better one in the future because you value comfort today rather then tomorrow. Spending isn't driven by inflation, it's driven by knowing we have limited time to live.
Do the people cheering this understand that inflation is not a 'baseline' measurement, but a relative one? CPI (which inflation is measured off of) is based on the cost of a fixed bucket of goods, which you can see here [1]. In January 2020, this bucket of goods cost $259 units. Today it costs $304. For context, had the CPI maintained target interest levels of 2% per annum, then today that bucket of goods 'should' cost somewhere around $278.
And even this substantially inflated bucket cost continues to rise, quite rapidly. In other words, this news does not mean that prices are going to go down - let alone return to the normal. A slowing inflation rate is better than the opposite, but that's really all this is. We are not at the finish line or anywhere remotely near to it, yet. It will be important to see how inflation continues, especially as wages adjust. In particular, a raise of ~18% over the past 3 years (in total), would be the break-even point. Below that and you'd be seeing a real decline in wages, which I think is almost certainly the vast majority of people.
> Do the people cheering this understand that inflation is not a 'baseline' measurement, but a relative one?
Yes, of course. Inflation is a derivative, and when the rate at which prices were increasing slows down: that is worth cheering. It's a good thing (for consumers) in and of itself.
Yes, I think most people who are paying any attention to either inflation rates or the economy know that an inflation rate of 2% does not imply deflation.
And there is no finish line, this is an infinite game, not a finite one.
Lastly, wages are also up over the last three years (that’s a huge driver of inflation!). Obviouslyy not evenly distributed, but I don’t think you can make the case that real wages are sharply decreasing (especially once you remove the weird outlier spike that 2020 gave us): https://fred.stlouisfed.org/series/LES1252881600Q
Fed officials are focused on cooling stubbornly high core inflation, which excludes volatile food and energy prices. Economists see core prices as a better predictor of future inflation than the overall inflation rate.
Rising car prices, strong demand for labor-intensive services and an earlier surge in housing-rental prices have contributed to core inflation.
“Where inflation is proving sticky is in services—getting haircuts, getting your car repaired, buying car insurance,” said Leo Feler, chief economist at Numerator.
Economists estimate that core prices rose 5% in June from a year earlier, compared with 5.3% in May.
From: https://www.wsj.com/articles/consumer-price-index-report-jun...