We're at 4.50–4.75, no?
That's not low, but it's not high either. https://en.m.wikipedia.org/wiki/Federal_funds_rate#Historica...
1. I'm not sure you replied to to the right comment as I mostly just shared data regarding the claim that the current rate is high.
2. I'm really not sure it's a consensus but I think it's a question of no landing (ongoing inflation) vs hard landing (recession) - as far as I know (though I'm really not well educated when it comes to economy), in the entire Fed's history, inflation has never just disappeared by itself without restrictive financial conditions. I think it wouldn't be hard to argue why a no landing scenario could be worse than recession.
Rising prices are supply not meeting demand. It feels like improving productivity would be an equally powerful tool with less human cost. Granted that is a harder thing to control quarter over quarter.
Consider this analysis that intetest rates may in some cases raise prices. https://economicsfromthetopdown.com/2023/02/04/do-high-inter...
And more links along that line from the pluralistic blog. https://pluralistic.net/2023/02/04/if-i-was-a-horse/#friedma...
Does anybody else hear talk of productivity in talk of inflation?
The mainstream economists are wringing their hands over full employment and rising wages, the first time in decades that we might see the middle class grow, because production isn't sufficiently meeting demand.
We should be producing more stuff - especially housing - instead of trying to keep people from earning more.
Housing costs thus increase to suck all income.
It’s a great way to return to feudalism.
If you have a bankrupt government that can't afford interest payments, then raising interest rates will just lead to borrowing more money to pay the interest in a vicious cycle until hyperinflation sets in.
If you can limit borrowing and speed up payback of debts through any means other than raising interest rates you achieve the same effect much sooner.
Their ability to fight inflation is tied up in market participants believing they will do what it takes to do so even in the face of harsh costs. If that reputation comes into doubt, we could end up with the worst of both worlds.
No one had a normal economic life for several years. It’s a miracle that these levers have been adjusted to the point that everyone is like “well no one going to work for three years had no impact! What over-reactionaries!”
Where did this happen?
Anecdotes and economics get kinda blurry here. It’s like how Austrian economists must feel 110% of the the time.
This is one of many of my associates in the service industry that had employment challenges.
If you had regular job, you were eligible for unemployment there was also PUP enabled due to pandemic, so if you were self employed you could request unemployment under that. In addition there were also short periods of time where you could get extra $600/week (as it is impossible to survive for long on the usual unemployment amount)
They tend to work as contractors on a limited term contract and intercalation maritime labor laws are unlikely to require it. Note also the country of registry for the ships may have more lax labor laws too.
We were all subject to one master. But under a different punishment.
This may have been your experience but it was nowhere near mine. I think talking about “tech” as a whole is generalizing too broadly.
Nobody has a magic crystal ball for what's next.
People will be in between any of the above situation simultaneously, but between having to get fired and seeing costs go up a little at a time, I imagine most people will defer the gut punch and take the erosion of spending power.
Inflation shrinks the present value of that debt, without requiring the government to cut spending to pay it down, which would have serious economic consequences (see: austerity).
holding cash is paying something for the first time in more than a decade
Park your cash in a 5% instrument for a year and you can still afford 3-4% less stuff than you could at the beginning of the year.
That's fine for me with a mortgage, but less retirement headroom for many older people.
I personally have a hard time going out to a restaurant and getting a 2 person meal for less than say 30-40$. Car market is absolutely through the roof. Housing market, although cooling slightly, is still through the roof. Our base rent went up 15% last year. Gas is now double in my area.
So if you have 6% inflation, and the return on e.g. the 1 year t bill is 4.75%, you have -1.25% "real" interest rates, because your money at the end of your year of investment will be worth ~1.23% less than it was at the beginning of the year.
I'm not sure I completely agree that the result is actually as bad as that, since stuffing your money in the mattress would put you -5.5% in the hole by comparison, but still.
this is just about making a prediction of the future.
if you believe that inflation will decrease then your guaranteed rate of return from interest rates is great.
if you believe that inflation will increase or stay the same, then yes we have "negative interest rates"
I don't think it's reasonable to call it a "real" interest rate, because I can't buy T bills against it and it has no guarantees
If it came up red they would be telling me they were a financial genius who had unlocked the secret to riches.
I feel that people taking out variable loans at 1% and hoping it won’t go to 4% aren’t as reckless as a gambler, and in hindsight it’s pretty easy to lecture them, but I don’t take any joy in it.
I’ve seen online estimates recently 3 or 4x what you’ve stated and it wouldn’t surprise me if those were correct but we’ll never know.
Allowing ownership of houses as an investment is just wrong. (The usual response to this is that you need investors or housing won't be built. The idea no-one would pay for a house to be built is silly, but we also have not-for profit housing associations.)
(And it’s of note that dealing with renting a SFH is possibly a worse experience than renting from a complex. Large enough complexes have maintenance staff and professional management. Someone renting a SFH might well have just that unit to rent - amateur hour. Or they could be a corporation but because you’re just one unit in probably a more spread out population of properties the renter might well experience lowered services from the property management.)
I do agree the investment activity we’ve seen in simply hoarding up SFH properties for investment is deeply problematic. There are all sorts of ways to push the market back towards owner occupiers.
It’d also be nice if it was a standard thing for working people to be able to make it to public local government meetings. Those tend to be timed when working people are at work. That could help something’s, but there’s probably still be a lot of NIMBYism…
It's harder for both to purchase, but investors are also heavily leveraged and fighting investment alternatives in a higher-rate environment.
Because high interest rates can reduce demand, in a vacuum you would also see a reduction in the price of the property, making them more affordable. Of course this price is also impacted by countless other things, builder velocity being one of them, so in the real world it takes time to sort out.
The 70s, 80s, 90s had relatively stable home ownership rates despite very high interest rates. In 2016 the US reached a bottom in home ownership at 62.9 despite historically low rates.
BTW I was not referring to rich people living in their homes that they got with high interest rates, the comment was specifically towards investment property. Definitely agree that hoarding properties is out of hand.
Rent-seeking is an activity where the perpetrator creates legal barriers that result in them collecting money without providing anything of value.
Many people hate on landlords, but unless they’re also actively restricting new supply, they’re not rent-seeking as the term is defined.
But I agree with your point.
- prevent corporations from owning residential property
- tax property rental income at a substantially higher rate than income and exempt it from other deductions
- tax residential property which is empty for more than de minimis periods at an eye-watering rate (perhaps 5-6x standard property taxes).
None of this requires higher interest rates, but it will result in a transfer of wealth away from aging boomers and corporations, which apparently must be avoided at all costs.
As we have seen the asset markets have adapted to low rates by increasing assets prices. Thus an increase in interest rates to what historically has been low does not offer a great way to analyze its effect.
The question we should rather answer is by how much the assets will lose in value and what are the options of people depending on this value (retirement, disability funds etc...) and for people indebted, did they forecast and are they able to stomach an increase in interest spending of roughly an order of magnitude?
Even 432 Park Avenue, the new huge luxury tower in NYC, took 3 years. A random startup takes a lot longer to get to the money.
Some investment just keep adding to society's wealth, while others have a return and then go away. The first kind is really important because it enables new investment on things that depend on it, the second one doesn't.
Well, good luck trying to attribute an specific value for a child. But for your other examples the classification is mostly straightforward.
Because one cannot talk about the recent low interest rate environment without also talking about the quantitative easing environment which pumped trillions of dollars into Banks who figured they had should do something with some of it
Much like we have records of Chinese warlords or Byzantine princes engaging in rent seeking and breaking the system to cater to their needs, so to is their plain evidence of what and why things played out they way they did.
[1] https://fred.stlouisfed.org/series/GFDEGDQ188S
[2] https://fred.stlouisfed.org/series/A091RC1Q027SBEA
[3] https://www.defense.gov/News/News-Stories/Article/Article/32...
Have you personally already purchased your first home? Without family assistance, it would be absolutely brutal and untenable for my children to enter into in this domain at present.
The people at the bottom are getting a remarkably harsh and bad deal these days, even in instances where they have been exceedingly fiscally responsible their entire life. Is this the future the youngsters deserve? My kids are still solidly upper middle class, imagine what this translates to for the lower end of socio economic status.
This seems severely suboptimal. At what point is a serious systemic correction warranted? What is the current generation supposed to tell their children? At some point people's motivation to participate in the system and play by the rules will be negatively impacted. What happens then?
The home loans are unaffordable because the house prices are too high. The median house price in 1989 was around $95K ($230K adjusted for inflation). Today it's about $400K.
If the housing stock is too expensive for the population there can be many causes, and higher quality or larger size housing is just another cause. The causes of the high prices don’t matter to buyers, all they know is they can’t afford to buy. What use is it to them that the homes they can’t afford are better quality?
Improved insulation and air sealing is nice, but you’re not going to see anything close to $200k in energy savings over the building’s life vs just blasting your furnace to a comfortable temperature.
Houses certainly have increased in size though.
https://eyeonhousing.org/2021/03/age-of-housing-stock-by-sta...
https://www.npr.org/2022/07/14/1109345201/theres-a-massive-h...
Worryingly, the higher interest rates are making it more difficult to construct the housing we so desperately need in so many places.
Mom & Pop trying to get a couple of AirBnB's ain't helping either.
https://www.theatlantic.com/ideas/archive/2023/01/housing-cr...
Or $1600/month? This has a nursery so they can fix the dink: https://www.redfin.com/MD/Pasadena/3500K-Lochearn-Ct-21122/u...
If DINKs can't afford it, what does that tell you about the direction housing prices will go?
The ones with capital will buy them, and you will be renting.
And if you look at the capital buying up houses, it's a tiny fraction of all available housing out there.
The correct answer is - just like when housing prices went up with low interest rates, they'll go down with high interest rates.
Elites and wealthy boomers will keep soaking up resources, then prices may become volatile in a southward direction.
In the meantime, the current generation is frozen in place, unable to progress in a rigged game.
I haven't, but I'm not a DINK, and have never broken six figures.
The right credit union will make a home loan with no money down, which might help your kids and their spouses. I'm currently paying $3k/month for rent. Zillow says that this could afford a $350,965 home with a 30-year 6.833% fixed rate, including 1.2% taxes at $351/month and $800/year in homeowner's insurance at $67/month, and mortgage insurance at $287/month. Not possible in this area, but possible elsewhere.
Unfortunately it is for the people who have gotten their mortgages at those lower rates. It's a ticking bomb for many of them.
> We know inflation should start decreasing within a year or so
Indeed
a) if the issue reoccurs, the learnings are ineffective b) if the issue is new, how can you tell how to move the knob without pissing a lot of people and losing your job.
It is a lose-lose game.
The balance sheet is used to direct effective interest rates intramarket -- not a separate knob.
The genius solution that they came up with is transfering billions of taxpayer money from the North to the South- which is not very popular among voters.
That's true regardless of the interest rate situation...
> We have gone from a zero interest rate economy to a high interest one within months.
IIUC, even the Fed's pretend "Natural Rate of Interest" is higher than current rates - meaning even they seem to believe they're still stimulating the economy somewhat with their policies.
Current interest rates are still arguably low. And AFAIK, no major central bank is even considering an interest rate - ever - that would actually be "high" or even positive in REAL terms.
Especially since the same was true (financial experts were talking out of their ass) for the whole easier to predict zero interest rate period too!
Can't predict really as you said. You can bound expectations though.
Best outcome is perhaps interest rates get lower and things resume as normal assuming there is no other lockdown say.
Do you mean the early 1970s when the US moved off the gold standard and there was a massive oil shock?
Or the late 1970s when inflation made an attempt for a runaway spiral?
> get lower and things resume as normal
The last few years (2008-present) have been anything but “normal”.
The Fed has been full throttle on the lowest interest rate for years and Quantitative Easing / asset purchase programs. Stocks and VCs have been juiced with cheap money causing massive distortions in many markets.
Normal would involve checking and savings accounts paying a non-trivial interest rate. It would involve actual due diligence in VC, not rubber stamping FOMO. Your “normal” probably needs some recalibration.
a) You assume that me saying "best case" if we continue as is, is a good case scenario -- from my point of view it is not. Which is what I am expressing.
We both agree here we are not in a good situation. Even if we "recover" GDP wise the buying power of the middle and lower classes is taking a serious hit.
This is one of the results of Volcker's policy (to remind he set the Fed policy in '70s) which we are following or asked to follow by some segment of the banking world today (cf. https://econreview.berkeley.edu/then-and-now-the-crisis-of-t...) Thus, my '70s reference.
b) Already economists do not consider 2008 crisis as over. But we are arguably in a continuation of that crisis. Again, this is how an economist historian is going to treat the 2000s. Normal could be before that and sure I could recalibrate my normal, but do you think we should expect magical times?
The view that Fed is using too much QE and too much free money is political and moral. I offer no opinion and definitely did not try to include it in my 3 line opinion.
Disclaimer: I do not abide in the market efficiency camp. I think history proves that markets are inefficient.
> Normal would involve checking and savings accounts paying a non-trivial interest rate.
Even now that the fed fund rate has increased, the savings rate offered is low. Why? Because the business model and flows of banks has changed. They don't need to ask for your money. They are going to get it in the U.S. even indirectly. Perhaps they still care if you are a high value individual that can give them a few millions and give them a few percentages of fees annually.
They are also now allowed to treat checking and savings the same, thus able to issue more loans. (U.S. detail.) Namely, Regulation D has changed and thus the definition of M1 money also.
[0]https://www.federalreserve.gov/boarddocs/supmanual/cch/int_d... [1] https://fredblog.stlouisfed.org/2021/01/whats-behind-the-rec...
Those times are over for the foreseeable future, unless U.S. or E.U. enters an unprecedented recession that stirs the banking world fundamentally.
If people in aggregate are suddenly unable to "afford" things, then you're not talking about inflation. People (again, in aggregate) have more money (not wealth) than they did a few years ago, which is what "inflation" means. On average, it's a rescaling, nothing changes.
Now, individuals may be hurt or helped[1] by this aggregate rescaling. But it remains a rescaling, and if you try to interpret it the way you just did you're going to get your predictions wrong every single time.
[1] FWIW: if you hold a mortage or any other large non-inflation-indexed loan, you should be cheering for inflation to dilute your debt. Most US homeowners are coming out ahead. They don't explain this well on the news networks though.
So, sure, if you want to rephrase and lament that people are unable to afford stuff because of the recent drop in supply (or increase in demand) for the products they want, that would be logically consistent. But it would be factually wrong, as in fact in aggregate[1] world GDP is doing pretty well right now.
[1] As above, specific products and markets are always moving. Something is always more expensive than it should be and there's always a glut in something else. People were complaining about eggs last week, IIRC.
The mean purchase power has a very small impact on society.
And yes, the disruption tends to pass after the inflation goes away. But none of that makes the argument specious.
Yes, and it has a different temporal behavior from the impact on the purchase power. The same person can be affected by both.
As a rule, inflation infuriates people because almost everyone jut wakes up some day and discover they are much poorer than they used to be. You can't dismiss this by pointing that their net-worth improved. (But yes, the net-worth of a lot of people improves.)
I'll certainly grant this, not the least because they get terrible information about it from media and online sources.
> almost everyone jut wakes up some day and discover they are much poorer than they used to be
Like this. This is not true. This is a lie. You need to stop saying this. People are "much poorer" post-inflation only in the sense that they were "much richer" post-pandemic, due to the huge savings boom. If you aren't willing to look at the latter, then you're not doing the analysis correctly.
At most, "some" people are "much poorer" due to asymmetric effects. But you're just wrong here if you try to extend that to "almost everyone". Please stop.
https://en.wikipedia.org/wiki/Richard_Cantillon#Monetary_the...
Job data trails rate increases by many months. So do recessions.
If the fed levels off interest rates within the next year or so, we have a very good chance of avoiding a recession. I am young/old enough to remember the last time interest rates were this high, and we were BOOMING.
If the fed pushes the gas on interest rates, it will likely push us into a mild recession.
Thanks (covid!) to millions retiring along with remote work, it would take a black swan event to really push things into the red. Note that we have a few possibilities for that setup, but so far, nothing has pushed every button as of yet.
I predict a sideways trend for the near future. A really good event unrelated to employment will pull us up, a really bad event will drag us down.
Otherwise, please share the magic crystal ball sources.
Increasing those interest rates will cause zombie business interests to go broke by increasing their borrowing costs.
This will probably look something like a meltdown in the office and retail commercial MBS for a start (I have no idea who else is out there ready to join the party once it gets started, but that's a good start).
Already sales of CMBS have fallen 85% from where they should be this year:
https://www.bloomberg.com/news/articles/2023-02-17/sales-of-...
Those interest rates also go into everyone's Discounted Cash Flow models, which affects the prices of assets across the board, once people start to adjust to the fact that higher interest rates are going to stick (until the Fed blows up the economy, which of course means the beta value in those models needs to increase).
Once the unemployment rate climbs back to 6-8% or higher then the Fed will probably cut interest rates back down to zero again due to the recession that they will have created. With more slack in the labor force then when they do that inflation will not reemerge. The recovery won't be V-shaped like the pandemic recession because businesses will be allowed to go bust without any kind of government support -- the recession may be particularly bad since the Republicans in the House will want to hang the recession on Biden (a situation which didn't happen in the 2001/2008/2020 recessions since there were Republicans in the WH and cooperative Democrats).
Not sure that's the case, I work in RV, which is a leading indicator for recession and recovery. RV volumes have been getting hammered for the last 8 months. OEM mfg numbers are down over 50% year on year. [1] Sure it's just one small segment of the overall economy, but things are getting strange out there.
[1] https://rv-pro.com/wp-content/uploads/2023/01/Shipments2.png
However volumes this year are projected to be in the low 300k range. [2] Also these projections seem to be getting revised lower every month. These are numbers the industry hasn't seen since 2014. So we're not returning to pre-COVID levels (record shipments in 500k range in 2017 and 2018).
The industry is being cut in half (at least) right now. And the drop is predicted to be long (we're already 6 months in, and the articles are saying this will last until at least the end of 2023). There's something deeper going on here. I think that something deeper is a recession.
Not saying I have all the answers. But from the angle I'm sitting at this looks a lot like the decline seen after the housing bubble and 2008 crisis.
YMMV
Right, of course. Election time.
Whether this decrease is sustainable is indeed an open question.
The lag is also easy to understand since interest rates don't immediately hit businesses borrowing cheap money short, until their loans rollover and readjust on a roughly 1-2 year schedule. The economy can also absorb the first waves of those failures and it just takes awhile for the volume to build up.
> Whoever claims to accurately predict what's going to happen in the next few years is talking out of their ass.
> We know inflation should start decreasing within a year or so,
We don't know that. In fact, it's actually a pretty commonly discussed possibility that inflation could stay high (>5%) for the next decade due to retiring baby boomers and other reasons
(Energy prices were much less affected in the US, but the economies are linked by trade)
That is assuming the Russians eventually pull out of Ukraine, are completely beaten militarily and their assets will be used to fund Ukrainian reconstruction, and it assumes that China does not increase tensions with Taiwan or, heaven forbid, actually invade.
Should the war drag on, the situation will grow completely unpredictable - eventually, governments (no matter their political orientation or prior campaign promises) will have to raise taxes to pay for Ukraine aid and especially new arms projects, which means price hikes for the masses as companies will just pass through tax increases instead of accepting lower dividends for the capitalist owner class.
> but you cannot predict how millions of people will react to suddenly not being able to afford stuff.
IMO: Riots are inevitable IMO unless politicians invest money into at least filling the gaps for the lowest rungs of the societal ladder, the French are blazing the trail here - and it's only a matter of time until at least the UK population has enough of empty supermarket shelves. In the US, it depends if Biden will be able to secure a second term.
The problem is the political implications... for one, it would send a signal to China that a land-grab against Taiwan will yield a bit of trouble but nothing too serious. That's the worst case and I seriously hope that that alone (and the economic devastation associated with TSMC blowing up their fabs to prevent them from falling into Chinese hands) is enough to keep the support going.
The other factor is that it might lead to a complete fracture of the NATO - Finland, the Baltic nations and Poland will not accept any kind of Russian success out of that war. They're all no big economic players in the EU/NATO, but a major internal dissatisfaction in NATO may entice other players in the world to play rough again as well, not just China.
Ukraine gave up their nuclear weapons and long strike weapons in exchange for a promise to not be invaded.
After Russia broke that promise who would ever make that same deal again?.