
Fed likely to keep raising rates - petethomas
https://www.reuters.com/article/idUSKCN1ML2KM
======
zaroth
There seems to be significant disagreement over how robust this recovery is.
It’s hard to separate out political posturing from rational economic argument,
but the macro indicators certainly seem powerfully positive.

People can’t seem to figure out why inflation is so low with employment so
high. The Fed is doing what they do when unemployment drops this low, despite
the fact that inflation isn’t knocking at the door.

It seems like the best assessment is that as long as the macro indicators stay
strong, we might as well dry out some powder for a rainy day.

But I personally worry about knocking the legs out from under the strongest
bull cycle we’ve ever seen when the next few years seem poised to deliver very
strong gains, particularly to disadvantaged populations which are the hardest
to bring into full employment, and for whom better paying jobs are life
changing.

~~~
pcwalton
> But I personally worry about knocking the legs out from under the strongest
> bull cycle we’ve ever seen

Because when the tide goes out—and it will—the Fed needs to be in a position
to reinvigorate the economy. It's standard mainstream economic theory.

We're already in a precarious position, with the Tax Cuts and Jobs Act doing
precisely the opposite of what we should be doing. Thank goodness the Fed has
so far managed to remain sensible. I would be far more worried if they were
_not_ continuing to raise rates.

~~~
ryanmarsh
The Feds balance sheet is nuts. We all knew they’d need to deleverage at some
point.

~~~
alecco
I'm no republican, heck not even close to US. But the timing of it raises
eyebrows.

~~~
ryanmarsh
Well I wasn’t going to go there, but yah. The timing does smell a little.

------
apo
What's "loco" is not the tightening now underway, but the super-lax monetary
policy that preceded it for many years.

The Fed kept short-term rates close to zero for nearly a decade. Longer terms
rates were negative for many years.

All of the world's central banks joined in the orgy of money creation.

The Fed's balance sheet (assets bought by conjuring money) ballooned 4x in the
same time:

[https://www.federalreserve.gov/monetarypolicy/bst_recenttren...](https://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm)

This Fed will now face unprecedented political pressure to reverse its course
of monetary tightening and balance sheet unwinding. The President will almost
certainly lose an election held during a recession.

But reversing course is going to be very difficult, given the sharp and
sustained rise in inflation over the last few years:

[https://stats.bls.gov/regions/mid-
atlantic/data/consumerpric...](https://stats.bls.gov/regions/mid-
atlantic/data/consumerpriceindexhistorical_us_table.htm)

Oddly enough, it looks like the President has the legal authority to fire the
entire reserve board if he so chooses:

 _Upon the expiration of the term of any appointive member of the Federal
Reserve Board in office on the date of enactment of the Banking Act of 1935,
the President shall fix the term of the successor to such member at not to
exceed fourteen years, as designated by the President at the time of
nomination, but in such manner as to provide for the expiration of the term of
not more than one member in any two-year period, and thereafter each member
shall hold office for a term of fourteen years from the expiration of the term
of his predecessor, unless sooner removed for cause by the President._

[https://www.federalreserve.gov/aboutthefed/section10.htm](https://www.federalreserve.gov/aboutthefed/section10.htm)

Never before in the modern history of US banking has there been a President
with so much drive to kick convention to the curb, nor a Federal Reserve that
has painted itself into such a small corner.

If I were a gambler, though, I'd bet on the President. One way or another, the
Fed will be forced to reverse its balance sheet unwinding and short term
interest rate increase campaign.

~~~
nopinsight
This article says that the President cannot fire Fed Governor at will or
because of policy disagreement.

[https://www.marketwatch.com/story/why-trump-cant-fire-
powell...](https://www.marketwatch.com/story/why-trump-cant-fire-powell-for-
disagreement-over-monetary-policy-2018-10-11)

"The law goes back to the 1940s when President Franklin Roosevelt removed a
member of the Federal Trade Commission and cited as a reason their divergent
views of public policy. The Supreme Court unanimously reversed the firing,
saying executives of independent agencies cannot be removed in their term of
office except for cause. These agencies “must be free from executive control,”
the court ruled."

I would be interested to learn more so it would be great if someone has more
info to share.

~~~
apo
We used to think that Presidents can't unilaterally enact new trade policy.
That also turned out to be wrong.

What's more, the active term is "for cause," which is an exceedingly low bar.

------
nabla9
US government is implementing pro-cyclical fiscal policy ­­­– throwing more
money into already heated economy.

Of course Fed should attempt to suck at least some of that excess out of the
system.

------
PhilWright
Forgive a related question, but I have never understood why quantitively
easing was used to get demand into the economy by buying back bonds. Surely
the money will just get reinvested in stocks or other bonds and not stimulate
demand? Buy back a rich persons Ferrari and they just go and buy a Bently
instead.

Why not do the obvious, which is to give every adult some free money each
month? Most people are not rich and so most of it gets spent very quickly on
goods/service? I live in Australia and this happened back in 2008 to stave off
a recession. I remember twice getting cash in the bank account without having
to do anything! I am not an economist so forgive me if this is a banal
question.

~~~
lottin
> Why not do the obvious, which is to give every adult some free money each
> month?

Since the supply of goods and services is fixed in the sort term, pouring more
money into the economy doesn't change anything in terms of consumption. Only,
prices go up, because there's more money competing for the same amount of
goods and services. These idea is called "neutrality of money".

~~~
RidingPegasus
Given that it's cash payments "each month", how can that be short term? If all
recipients simultaneously wanted to spend the money on burritos, by month 2
there's going to be a lot more restaurants selling burritos.

A better use of the money is infrastructure spending. It provides employment
across multiple sectors and targeted correctly is one of the best investments
a government can make.

------
qwerty456127
BTW can somebody share a link to where can I download historical data on the
interest rates of all the major countries central banks (FED, BOE, ECB, BOJ,
RBA, SNB etc)? BOE is the easiest, FED is not hard but for the majority of the
rest finding the historical rate datasheets seems not really easy.

~~~
lbotos
a start: [https://www.global-rates.com/interest-rates/central-
banks/ce...](https://www.global-rates.com/interest-rates/central-
banks/central-banks.aspx)

~~~
qwerty456127
Thanks. I know this site but it has (or I just can't find where are the full
lists there) really short lists - just 10 last rate changes for every country.

------
RyanShook
We’ve been in a low rate environment for almost a decade. Rates need to rise
but it needs to happen more slowly. Just because the fed has been warning
everyone it’s coming doesn’t mean the market is ready for it.

~~~
thoughtexplorer
> Rates need to rise but it needs to happen more slowly.

How do you know?

Serious question: Would anyone realistically have a better idea than the fed
about that?

~~~
dlor
I tend to agree here. Any tolerance for "slowness" is anti-free-market. I
don't necessarily think completely free markets are optimal, but I can't see a
reasonable argument for slower being better than faster in general.

------
ceejayoz
They pretty much _have_ to. With big tax cuts and trillion-dollar deficits
during a _boom_ time, we're not leaving much in the quiver to use in an
economic downturn.

~~~
briandear
You mention tax cuts and deficits — isn’t spending equally to blame? Why is
cutting government spending viewed by some as not an option? Those who oppose
the tax cuts almost never suggest cutting entitlement spending which is the
largest percentage of the federal budget — 56% of all federal outlays are from
mandatory entitlements. That’s far more significant than any tax cut effects.

Besides, even after the tax cuts, the government has collected record revenues
this year. We are collecting plenty in taxes — but we are spending it wrong.

Here is a list of some of the more ridiculous expenditures:

[https://www.dailywire.com/news/12309/9-ridiculous-things-
gov...](https://www.dailywire.com/news/12309/9-ridiculous-things-government-
wasted-money-year-aaron-bandler)

~~~
cthor
The list of "maddening" items in this article are so comically low-budget it's
hard to take this complaint seriously.

None of the 9 listed in the article sound particularly egregious. Almost all
are grants to research institutions, which as a process has a lot of flaws,
sure, but unilaterally cutting all grant funding is definitely not the
solution.

The report totals at $5 billion, but the supposedly most egregious are not
even in an order of magnitude near that cost.

Meanwhile, federal income is measured in trillions.

If you want to actually cut federal spending, you have to cut pensions or
military spending—political suicide.

~~~
ngngngng
A few thousand facebook, twitter and reddit bots and we could get trump fans
to start asking for this.

------
Alex3917
So will this force all the tech companies that have been raising huge amounts
of capital in the private markets to finally go public?

~~~
adventured
The question is the point where rates start to cause serious valuation
deflation. Is that very near? Is it 3%, 4%, 5%, etc? There is a lot of money
sloshing around looking for somewhere to go. There's a rather epic pile of
cash sitting on the sidelines at this point.

I doubt that breaking point is as high as it was in the late 1990s, both
because of the debt load in the economy being higher and markets being a lot
more sensitive to rate hikes after nearly a decade of exceptionally low rates.

More broadly, mortgage rates just hit a seven year high. That's going to start
to slam the brakes on some economic activity as people re-adjust to more
expensive borrowing costs. It'll soon climb well over a 5% average for the 30
year fixed at the rate the Fed is hiking. That's cheap vs the 1980s, however
consumers have been spoiled. On the affordability upside, it'll start
restraining house price increases.

Corporations are fairly well loaded up with debt. That's all going to start
getting more expensive. The increase in interest costs over time will to a
modest degree eat into some of the profitability gains the corporate tax cut
delivered. Fortunately for US corporations, their profitability is also at an
all-time high, if they're smart about it at all they can trim back debt as it
gets more expensive (we'll see, I'd expect a mixed bag of behavior).

------
WouterZ
Lack of inflation is not easily understood through the lens of individuals.

Better to look at the fractional reserve system. The Fed creates money (M0), a
lot of it in the shape of quantitative easing. But it was offsetting the
deleveraging banks (reduction in M, M2 and M3). M0 = cash, M1= M0+ short-term
instruments, M2= M1 + medium-term, M3 = M2 + long-term stuff /mortgages.

Even now, banks are less leveraged due to more stringent capital requirements
(think Basel accords).

Translation to inflation is tricky. It's about demans vs. supply at its
fundamentals - too much supply them you introduce inflation. Since banks can
create money, supply is governed by M1,M2,M3 depending on the horizon. Demand
is the economy which looks to be booming. Plus in the case of the US, the
dollar is still the global reserve currency. So we have China, developing
countries wanting more dollars. And the world still uses it as a vehicle
currency, trade in brent oil is in dollars.

And we have inflation expectations - which is why the Fed is independent. And
Trump should be quiet. The Fed will target 2%, thus we expect it to be 2%.

------
rukittenme
On the plus side, higher rates means lower assets prices and greater wage
growth.

~~~
NTDF9
How is wage growth getting higher because of higher rates?

------
purplezooey
This doesn't do anything to address the new Gilded Age we're entering.

------
hindsightbias
Paul McCulley, the guy who called the housing bubble and liquidity trap first,
had this to say (18 months ago):

McSquared - The Coming War between Trump & The Fed:
[https://www.youtube.com/watch?v=xnYZwxzxd9Y](https://www.youtube.com/watch?v=xnYZwxzxd9Y)

------
anon49124
Stupid^3. When (not if) the dollar is dropped, within a decade, as the de-
facto intl currency, the American economy, combined with the insane and
unsustainable public and private debt, will tank like nothing before.

[http://www.usdebtclock.org/](http://www.usdebtclock.org/)

~~~
hemantv
This combined with student loan debt is disaster in making

[https://goodlyapp.com/clock](https://goodlyapp.com/clock)

~~~
ceejayoz
If I'm Googling correctly, there's $1.5 trillion in US student loan debt right
now. We spent about that on the F-35 thus far, and it's only an extra year and
a half of the current annual deficit to pay it off entirely.

Or, to put it another way, wiping out all student debt in the US would
increase the national debt about 7%. Hardly catastrophic sounding.

~~~
gizmo686
There is a major moral hazard in just canceling student debt. Unless it comes
along with serious reform of higher education financing, the problem is just
going to come back much worse because, not only did we not resolve the
original cause of the problem, but now borrowers think that their debt will be
erased if they wait long enough.

~~~
ceejayoz
Maybe you're fixing the wrong moral hazard.

Maybe forcing people into debt to pay for a necessary education is the moral
hazard, and we could pay off that debt _and_ publicly fund secondary education
like most of the rest of the developed world already does.

------
anonu
The Fed is notoriously independent and cannot appear to be influenced by the
President. So if Trump comes out and tells the Fed to put a pause on rate
hikes... Well... It's enough reason to turn a "no hike" vote into a "hike"
one...

~~~
1123581321
What is this based on? I tried correlating decisions with presidential remarks
advising the opposite, but I’m having trouble finding and dating the
presidential quotes.

~~~
Donald
You won't find the quotes from US Presidents (present excluded). Heads of
state who comment harshly on reserve bank decisions are typically met with
steepening rates enforced by the sovereign debt market's perception of higher
credit risk.

------
NTDF9
Does anyone know why the FED has to keep manipulating the supply of money?

Let's say we have a very responsible government which taxes well, reinvests
well in productive work, private markets that operate smoothly, why does the
FED have to step in periodically to raise/lower interest rates (outside of
very bad circumstances).

Another way of asking this question is, "What is a neutral rate?" or "What is
an economy in equilibrium?"

~~~
twblalock
All you need to do is look back a little over 100 years to a time before we
had the Federal Reserve. It didn't look good. There was no equilibrium, but
rather a boom and bust cycle, banks going under and people losing their life
savings, and so on.

One of the Fed's purposes is to moderate that cycle. And clearly it does not
always succeed, but there is no reason to believe that the economy would reach
some kind of equilibrium or neutral rate without it, because we know that
didn't happen before the Fed existed.

~~~
NTDF9
The best explanation. Thank you.

I wonder if there's a better way to do this though. Maybe letting lenders
fail, arresting bankers for not pricing risks in loans and setting an example
is a better way to set up the money supply?

The busts are only painful if they affect non-speculators. Speculators
(lenders and borrowers) should handle their own risk?

I'm sure it's not easy but the current system really really favors the rich
with resources at the expense of retail retirement stock holders.

~~~
twblalock
> Maybe letting lenders fail, arresting bankers for not pricing risks in loans
> and setting an example is a better way to set up the money supply?

I'm not in favor of arresting people who did not break any laws, and it's not
illegal to misjudge risk when making loans.

~~~
repolfx
You don't ban making loans! You ban fractional reserve banking - the act of
issuing currency _not backed 1:1 by central bank money_.

All it takes to stop boom/bust is full reserve banking and abolition of
central bankers. Very simple, technically. After that to get yield on savings,
people must invest in funds and be exposed to their relative lack of
liquidity. Good bankers can keep things relatively liquid anyway, at least
when times are stable, but you'd still have to wait to get your money back if
you wanted out of investment funds. The underlying mechanics of finance are
exposed: loans still occur, but investors see that their money is gone from
their current accounts until the fund reaches maturity.

Now, will the citizens or politicians tolerate the long sucking sound as all
the unstable credit is withdrawn from the economy? No, probably not. It's
politically hard, not technically hard.

