its unlikely the fed is reactive enough in the short term to have any real effect on inflation presuming its tooling is effective. the interest rate hike took six months to implement, and began with a quarter of one percent increase. this was before earnings reports for the prior christmas holiday but november itself was a sobering enough red flag that Powell should have immediately pushed for 1% or more. its taken us nearly a year to arrive at the 3% we're at now, but in my opinion this inflation wont stop for another year, and it wont stop even at clinton-era interest rates of almost 6%. Quantitative easing --and the feds decade long addiction to it-- make this thoroughly uncharted territory. the interest rate push will likely be the straw that breaks corporate real estate, no matter how hard Bloomberg pounds his fists and demands a return to cubicles in his newspaper. this will likely tumble back into another residential housing or auto lending crisis. The student loan forgiveness push and reforms on wage garnishment also send a clear signal that our nations 1.73 trillion dollar nickelodeon of perpetual youth debt is becoming a serious threat as well.
Against this backdrop California plans on distributing $9.5B to any family who makes under a certain amount of money($1k each), I expect this huge infusion of cash to make inflation even worse and I do not know where this will go except that it will not be pretty.
The evidence for supply chain issues - as you mention - and price gouging being contributory causes is much more convincing. If you are not convinced that price gouging is going on, consider profit levels in energy companies in recent months.
Please don't blame this on workers who if anything need to be paid more, and paying them more will not impact inflation, only make it easier to cope with. It may even bring inflation down if jobs in supply chains become more attractive and force profiteers to become more competitive.
It seems a bit too on the nose for the literati on HN to have determined the definitive cause of inflation today is in-demand workers requesting fair compensation, as of the last 2 years.
Software engineer salaries have skyrocketed unbelievably over the last 20 years. What crisis is that responsible for?
notice that the real problem is the supply-demand inequality, not that real wages went up for a sector. (and to have a crisis it's almost always necessary for some other conditions to be present to make this one particular imbalance a very significant one that then drives other markets, eg. in case of housing that condition is the artificially very limited supply.)
the COVID stimulus checks were big, but not that big individually compared to the US economy, sectors, regions. people who needed it spent it, who did not put it into meme stocks, or bought something, inflating the price of luxury stuff like high end GPUs. that's most of it. (around 2020 July)
what put the whole economy into a freefall was ~1M excess dead and the rising energy prices giving a big speedup to the already falling supply-side dominos.
I just don't see there being any more reasonable objective cause and effect to that claim than the claim made by the commenter you are replying to. On the other hand in my own industry, prices for materials like lumber and steel have shot up massively causing major follow-on effects, and nobody at the steel mills are blaming worker salary for it. They're blaming the costs of the raw materials. And the people on the job site aren't blaming the tradespeople wages for the project going over budget, they're blaming the high cost of the steel showing up on site, late.
When workers are an issue for project delivery or budget it's usually not what they're charging, it's just availability. There are simply not enough field workers out there who can drive steel rivets or manage a punchlist. In fact, I hear rising wages brought up as a potential way to attract more people to the those field roles, because right now there are not enough people entering those roles.
So you can’t distinguish it without sharing the same morals as the speaker, and you therefore should “know it when you see it”.
When price increases exceed the increases in costs/raw-goods... then it's "greedflation", not "price gouging". Increasing profit margins are also a good signal of it.
Inflation and Price Gouging - https://www.nytimes.com/2022/06/14/briefing/inflation-supply...
Are Large Corporate Profit Margins Causing Inflation? - https://www.nytimes.com/2022/06/22/opinion/inflation-corpora...
I Listened In on Big Business. It’s Profiting From Inflation, and You’re Paying for It. - https://www.nytimes.com/2022/05/05/opinion/us-companies-infl...
So pretty much doubling down on the point: it’s gouging when I say it is.
Couple that with actual crackdowns on immigrations, and you get actual labor supply problems for some roles and industries. This has knock on effects that raise wages.
Couple this with inflation in CPI, and you get workers in a good place to negotiate raises to cancel out inflation and then actually increase real salaries commensurate with contribution.
Net, labor price increases are a symptom of labor supply and cpi. Labor is not driving inflation.
That's why it's important to stop inflation immediately. It puts the cost of living farther and farther away from those who can't keep up today.
When poor people get even the smallest bit ahead, “they are getting scattershot handouts”.
You are talking about families earning less than 2k/month. In California. I honestly doubt that can cover transportation expenses alone in SF.
9.5bn was what Wework was “worth”. Some poor people getting slightly ahead is not the problem.
If a bank trusts a company that they can repay a loan, they'll extend the loan. But if there's a credibility problem, they won't. At the margin, when interest rates go up some companies will cease to be profitable. Banks know intimately how profitable their borrowers are. Even if they have doubts, the income statements will show. So, when the times comes to refinance the loan, the rate may be increased, or the credit line decreased, or new covenants may be put in place, or some collateral required, or various combinations of these.
Corporations (and especially those rated "high yield", or non-investment grade) will see a double-whammy: not only interest rates will have gone up significantly (by 4% early next year), but also their credit spread will go up (see [1], on average it has gone from 3% at the beginning of 2022 to 5% now, and it will keep going up).
That creates the start of a feedback loop: with the increased burden of servicing debt, companies will become less profitable, some will start cutting headcount (just look at the HN posts lately and see how often layoffs are mentioned).
Of course, there's the other feedback loop: higher interest rates means higher discounting of future corporate dividends, dividends which will be smaller anyway, so that means lower stock prices. People will see their savings taking a hit.
And then, a combination of lower savings and higher job uncertainty will lead to lower consumer spending. Or demand destruction.
Which is what the Fed wants.
Make no mistake: the Fed is still the most powerful actor in the financial markets. By far. It has all the tools needed to fight the inflation, and then some.
Who else can buy up trillions of t-bills and mortgages at a moments notice? When they do this, it drops rates. The Fed offered up historically cheap money to borrowers to keep the economy rolling during the pandemic and housing crisis.
> But to the US Treasury, they're just a mechanism to fund the deficit.
The deficit doesn't get funded as well when the Fed is not buying. It's not merely a technicality. Someone else will have to fill the hole left behind by the Fed leaving the market, and that usually means higher rates to draw in money from elsewhere to feed the t-bill and mortgage market.
And this is why they aren't raising it more. If they do, and that doesn't work, people will act like the train conductor broke off the handle.
Short term interest rates being higher means that loans which roll over and refi on a scheduled basis (ARMs being one example) will have their interest payments move much higher. That will create delinquencies and stress in the financial markets eventually, but it will take some time for those loans to wind up getting refinanced at higher rates and for the loans to go delinquent. Watch for CMBS delinquencies to start climbing.
When the Fed says that they need to hold rates through 2023 and not cut people should also believe them. That's how they force the weak hands to capitulate and be liquidated. Everyone will naturally try to kick their cans down the road as long as they can, so it won't happen overnight.
The used auto market has been hot the last couple years, so it’s hard to predict what happens. But since most consumers buy based on the monthly payment, higher rates mean smaller, less luxurious car, which has implications for the profitability of auto manufacturers.
Also, some consumers have been using their homes as piggy banks, refinancing each time the value increases. When happens to consumer spending when they can’t do that?
I didn’t know this, could you explain when it’s last been used, if ever? Could they theoretically drastically raise margin requirements for some stocks and lower it for others to encourage sectors to be rebalanced?
>The recent rise in margin credit has focused attention on the Federal Reserve’s margin requirements for purchasing equities with borrowed funds, which has been at 50% since 1974. In November and December of 1999, margin credit grew very rapidly, outpacing the sizable appreciation in the overall stock market. And in January 2000, it grew further while the stock market’s valuation dropped, leaving the ratio of margin credit to market capitalization at its highest level in the past 29 years. This Economic Letter discusses the recent trend in margin credit and the merits of using margin requirements as a policy tool.
> ...
> The Securities Exchange Act of 1934 mandated federal regulation of purchasing securities on margin. The margin requirement was motivated by the concern that credit-financed securities speculation helped fuel the run-up in stock prices prior to the stock market crash of 1929. The act viewed the Federal Reserve as responsible for managing the availability of credit in the economy, so the Fed was charged with setting margin requirements for securities purchases. The Securities Exchange Commission was directed to enforce those regulations.
https://www.frbsf.org/economic-research/publications/economi...
According to Wikipedia, the rate hasn't been changed since the 1970s:
> Regulation T governs the extension of credit by securities brokers and dealers in the United States.[1] Its best-known function is the control of margin requirements for stocks bought on margin. The initial margin requirement for such margin stock purchases has been 50%[2] since 1974,[3] but Regulation T gives the Federal Reserve the authority to change this percentage. Raising the margin requirement ostensibly reduces risk in the financial system by reducing the potential leverage and total buying power of investors. Conversely, lowering the margin requirement increases systemic risk by expanding the buying power and leverage available to investors. Since 1974, the Federal Reserve has not deemed it necessary to adjust the margin requirement despite periodic extremes of price volatility in the equities markets.[4]
https://en.wikipedia.org/wiki/Regulation_T
Given the absolute neglect of the mandate it was given on this, I suspect the Fed views even mere talk of increasing margin rates as the nuclear option. But if the usual roll call of psyops fail to deliver, this thing is there in its back pocket. I imagine the mere threat would cut 20% off the S&P overnight.
The FED can make they matter again with a pen strike. It doesn't matter because they don't want it to matter.
Inflation isn't the result of mass psychology. It's the result of too much money sloshing around in the economy, thanks to trillions in deficit spending.
BTW, you cannot imagine yourself into having more money.
There is: that is the ECON101 feedback model of deflation causing money under the mattress reducing money supply causing deflation. That doesn’t occur because modern money systems don’t have a fixed supply of printed money; also governments actively prevent deflation so it isn’t seen.
“Opposite effects occur when the supply of money falls or when its rate of growth declines. Economic activity declines and either disinflation (reduced inflation) or deflation (falling prices) results”.
Rate of growth can decline due to consumer sentiment (psychology).
> BTW, you cannot imagine yourself into having more money.
Strawman.
Consumer sentiment (psychology) can become more positive, people borrow more (increase mortgages or buy a “better” house) and spend more (increasing the money supply).
Or it's because of oil suddenly getting expensive:
That earlier speech was far more direct and succinct than usual. Market participants should have gotten the same message then as they are now. The Fed intents to break inflation, with all the likely consequences that brings.
Whether the Fed actually has the technical tools to do this is another question. Most of what it does is mass psychology - trying to convince the markets of its resolve one way or another. Bank reserves haven't mattered for years as money, but that's pretty much the only lever the Fed holds. It holds another - margin stock trading requirements, but that path has all but been forsaken. Treasuries are the fuel for the financial system. But to the US Treasury, they're just a mechanism to fund the deficit. The contrast has led to some things that are hard to explain otherwise, and more things like this will no doubt arise in the future.