A simple example: If your mortgage or credit cards debt or car loans cost more due to higher interest rates, you are going to have less money left over to purchase other products.

This will make you less likely to want the new expensive Iphone, especially if you were going to finance the purchase, so as Iphone sales plumit, there will be less of a chip shortage since supply now meets demand.

OK so what happens if the chip shortage lasts longer (due to war and commodity prices)and with plummeting sales and corporate earning (which will reduce tax receipts as well) the economy will enter recession? So then what is the game? Do Fed keep the economy in recession? Or do they start QE again?

> Or do they start QE again?

Why would they start QE? Fed rate is at 4% right now, there's more than enough room to drop rates if an issue occurs.

Given the data however, its unlikely to happen. We're currently at record employment levels. The expectation is for the rate to keep going up to maybe 4.5% next year, and finally that's when inflation is quelled, and we taper off rates sometime next year.

Of course, we need to keep up with economic data and see if these rate hikes have the desired effects.

> Why would they start QE? Fed rate is at 4% right now, there's more than enough room to drop rates if an issue occurs.

Right but that will also increase demand and induce more inflation, no? So Fed will be perpetually stuck, in theory at least, to find a balance in their dual mandates.

Its like monetary policy is only a tiny piece of overall policy.

The big guns is Congress, not the Fed. Possibly the President if you consider things like averting the big Railroad Union strike last week (which would have certainly caused more inflation as shipping costs could have gone up).

Lots of little fires happening around the country. The fed has one lever: interest rates. Congress / President has the other levers.

----------

Still though: we watch the Fed because the prime rate has a large effect on the value of investments, especially in the question of stocks vs bonds. Its important for the individual investor to follow.

The fed has to keep adjusting rates as economic conditions change, yes.

The goal is equalize the demand with the supply. Keeping with the example, the hope is to see just as many iPhones sold, already limited by how many chips are available, but not with people fighting over them outbidding each other with higher and higher offers to obtain one.

A recession will occur if they overshoot, however.

Rate cuts don't just hit demand. They hit supply too and probably harder than they hit demand.

There is too much demand. If we could make all the stuff we can afford to buy, then we wouldn't have inflation. But it is how we get $12 for a medium #1 at Burger King, which is flipping insane.

Alternative: I now don't think a new house and car are worth it, so I have more money for things like iPhones, making the chip shortage worse.

Eh, not really. Because you're buying the house on a loan but not buying iphones on the loan.

When you choose to get a loan you're pumping a few hundred thousand that was leveraged into existence into multiple industries that gets distributed into the economy, that gets distributed to hundreds of people working.

When you choose just to just buy an iphone, that's $1000ish your spending of your own money.

Most people spend more money on cars and houses than Iphones. If interest rates cause you to you buy an Iphone instead of a new house or car you've probably contributed to lowering inflation more than increasing inflation because there's one less person bidding up the cost of houses and cars, plus cars have chips in them.

You're incentivized to put your money in savings because of the interest you can accrue in a savings account since interest rates are up for those accounts.

" A year ago Powell's keynote said the inflation is a supply side problem due to "transitory" issues."

This reminds me a lot of the 2008 crisis when Bernanke told us that everything was just fine until banks started collapsing. Personally I think the Fed has turned into a political institution that keeps inflating bubbles until there is no way out. I can't see much wisdom or foresight in their moves. They seem constantly behind the curve and instead of smoothing out business cycles they make them more extreme.

I want someone to prove you wrong, because I am right there with you. It seems like the swings just get wilder and wilder, and no one is at the helm.

Please someone tell me why this is incorrect.

There have been very few “swings” at all. This response is case in point for “so measured it is probably not enough”. Policy has been incredibly stable in the last decade, and then we had a crazy pandemic and the fiscal policy response, in hindsight, was wrong.

I don't even think it was wrong, it just went on too long. The US had an excellent recovery, but because Congress didn't want to pass automatic stabilizers, and they had a hard time passing laws, they set long expiration times- and the last stimulus bill went on too long in retrospect.

A ton of people called it as it was happening

It was believed that supply would return. It hasn't. Destroying demand means that you don't need supply to return.

Well they may have believed (or hoped) at the time that inflation was transitory, and are now worried that it's more of a wage/price spiral.

That's kind of laughable. Most people who know the very basics of economics knew this was coming after printing and dumping that much money into the economy early in the pandemic. They increased the supply of money with nothing of value backing it, which diluted the total supply's value.

Those guys have been calling for runaway inflation since 2011 though. So we ignore those permabears.

Calling "inflation" for 10 years in a row is basically boy-who-cried wolf. No one believes you, and when you're finally "correct" about it, its not because you had any analysis, its because inflation inevitably occurs in a boom/bust cycle.

Broken clock correct twice a day + Boy who cried wolf syndrome. I still won't be listening to the permabears / runaway inflation guys even with today's market conditions.

Is the doctor who tells you for 30 years in a row that you should stop smoking because you will get lung cancer, only right in the year when you actually develop the cancer? Was the doctor 'crying wolf' for 29 years?

When the Fed printed a Trillion dollars in November 2008 through QE1, and those permabears think crazy hyperinflation will occur immediately, yes, we ignore them.

When they say inflation will occur in QE2 in 2010, and those permabears think crazy hyperinflation will occur immediately, then yes, we ignore them.

When they say inflation will occur in QE3 in 2012, and those permabears think crazy hyperinflation will occur immediately, then yes, we ignore them.

When they say inflation will occur in QE4 in 2020, and those permabears think crazy hyperinflation will occur immediately, then yes, we ignore them.

Now its 2022, the Fed has been Quantitative Tightening for a year to deal with the inflation signals we're finally seeing. Hundreds of billions of dollars are being effectively destroyed by these policies.

-------

So yes, the Fed is finally acting on the inflation issue. But only because the data shows it is finally a problem. We don't just take the permabear crowd word immediately, we move when the data shows an issue. Not before.

There's some people who are just noise and are irrelevant to the discussion, unfortunately. You figure these things out over the years.

> We don't just take the permabear crowd word immediately, we move when the data shows an issue. Not before.

Following the data means you're inevitably running after the facts. Running after the facts inevitably causes feedback loops. I'm sure those feedback loops were tuned correctly to not blow the whole thing up, right. Right? RIGHT??

Say ... what happened last time? Oh ... right.

> Running after the facts inevitably causes feedback loops

No?

2008 through 2014 had signs of deflation, so the Fed lowered rates and went into QE.

2022 has signs of inflation, so the Fed increased interest rates.

Where is the feedback loop here?

It would be more appropriate to use something moderately healthy as opposed to "smoking". "Protein" might be a better metaphor.

You need protein for cells to work, and you want to grow and grow strong. But most protein has some potential cancer or heart disease correlation.

It's kind of the opposite though.

The fed ¡wanted! 2% inflation since 2008; even with covid fed policy, it took until spring 2022 to catch inflation up to the missed targets.

Came here to say this. I’m still shocked how many people including on HN have been fooled by the politics around this. I guess it works.

This just isn't true. https://www.igmchicago.org/surveys/inflation/ is a poll of the top economists in the country and they certainly didn't all agree that the level of inflation we now see was a certainty.

Fortunately, we can rely on continued immigration to increase the labor supply and control wage inflation and that's a good thing. The price spiral with flat wages will result in a generally reduced quality of life for the American worker though. I think that's a bad thing, but nobody in power has cared about that for the past fifty years[1] so why start now?

[1] https://economics.stackexchange.com/questions/15558/producti...

Spoiler alert, the “transitory” stuff was always bullshit and everyone knew it.

The inflation isn't due to war and chip shortages.

Care to elaborate and provide evidence?

No need to provide evidence for something that is obvious.