Jerome Powell had no answers to the Senate Oversight committee when asked how increasing rates would actually reduce that kind of inflation because his goal is to crash the economy for his buddies on Wall Street - they have lobbyists at the Fed too. [4]
[0] https://www.theguardian.com/commentisfree/2022/sep/25/inflat...
[1] https://newrepublic.com/article/166752/opec-cartel-gas-price...
[2] https://www.propublica.org/article/yieldstar-rent-increase-r...
[3] https://wjno.iheart.com/featured/brian-mudd/content/2022-02-....
[4] https://theintercept.com/2022/10/26/federal-reserve-bank-lob...
A IGM poll of ~100 of the world's leading economists pretty thoroughly show that your belief is very, very far to the fringe, more so than just about any other topic. [1]
They answer the "A significant factor behind today’s higher US inflation is dominant corporations in uncompetitive markets taking advantage of their market power to raise prices in order to increase their profit margins." with 2% strongly agree (with 3% confidence in this answer), 5% agree (7% confidence), 19% uncertain (12% confidence), 51% disagree (52% confidence), 16% strongly disagree (27% confidence), and 7% of no opinion or did not answer.
As to economic questions posed to this forum, this one is pretty slam dunk to the side opposite your claim.
Reich is about as far to the fringe of economists you can find. Try reading more widely. This forum is a much better place to get information about economics than opinion pieces in papers vying for views.
Real reasons for inflation: trillions were added to keep people afloat during COVID, and prices have gone up due to supply chain issues and the war in Ukraine.
If companies could simply raise prices willy-nilly, they'd have done it already.
[1] https://www.igmchicago.org/surveys/inflation-market-power-an...
Yes, it is too bad that our previously benevolent corporations all decided to end that benevolence in the year 2021 and gouge prices.
> crash the economy for his buddies on Wall Street
Of course, exactly what Wall Street wants.
The theory is that corporations will price at the highest price the market will bear and know that price from price tests they are willing to perform. "Inflation in the air" gave them all an impetus to more aggressively explore the space of prices consumers would bear, and it turns out, people who eat chips mostly won't stop buying them when they're 1.5x the price and the packaged weight is cut by 25% over a 2 year period -- and the same follows for a huge number of similar goods.
This is an acceleration of processes that were already under way, but it's also likely enabled by, likely not directly caused by, and likely feeding into "inflation", and it's likely not something that rate changes will directly impact -- though, maybe a second order change, e.g. a crash to the economy, could hurt workers to such a degree that they simply cannot possibly both buy chips and live. That might finally curb price hikes and would indirectly have fought inflation.
They have an agenda.
Sounds like fearmongering, to me, this kind of language.
>Corporations have the power to raise prices without losing customers because they face so little competition. Since the 1980s, two-thirds of all American industries have become more concentrated.
every single current economic issue is a direct result of government actions during the pandemic and trying to achieve long term ideological goals that weren't based on rational decision making
You left out supply chain disruptions and consumer demand fluctuation due to the pandemic.
It more seems to me like you have an ideological story you’d like to sell.
This is literally nonsensical.
Businesses will lose pricing power in a recession and will slash prices. Nobody will be buying new cars and their prices will drop, the used market will similarly drop until it finds a new floor. People who are out of work and can't afford their car payments will flood the used car market, etc. Multiply this by all the other goods markets. Same things for rents as people get fired and move back in with their parents or move out of the expensive cities.
I think I've responded to you before and I think you've got a nonsensical opinion that price gouging and inflation are in opposition to each other, when they just aren't. If prices rise, that is inflation. If prices rise due to price gouging because demand is inelastic, then that is also inflation. If the fed crashes the economy that will be deflationary and cause a recession, that will reduce prices. Companies can only collude to pump prices when they have inelastic demand, once the economy contracts sharply they have to defect and slash prices again.
By crashing the economy Powell intends to break the back of the nascent labor movement and by dropping asset prices will allow the rich to buy up more of the country.
Correct and incorrect. You are correct about the causes of inflation. But it's the Feds mandate to tame inflation, and their only tool is rates. The correct solution would be for congress to act - but they won't.
nah, any avid trader can take any direction of the market to capitalize on any opportunity
it doesnt matter what someone is lobbying for
when he was increasing the fed balance sheet, who do you think he was buying from and giving free money to at every transaction? his buddies on wall street
its the same any direction
All eyes on the 2:30pm press conference, where people will hope to divine the future from Powell's statements. I'm going to bet ~40 minutes of "Inflation isn't at 2% yet and we're committed to reducing inflation to that level".
I think what people really want to know is, where do these rate-increases end? In Sept. 22nd meeting, Powell thought 4.5% was roughly where things would end. Is the target rate higher now? Inflation is still strong, job numbers are also strong. Are we looking at additional hikes to 5% as we enter May 2023 or so??
People continue to underestimate the final rate and duration we'll end up at.
The market shot up initially on a 3 line statement in the released notes that was interpreted as beginning of the end of rate hikes.
Then the press conference started and the market shot right back down as Powell said we don't know how high and how long rates will go for.
I'm banking on another 75 bps raise in December and then another in January and then maybe a slow down to one or two 50 bps raises and then maybe a 25 bps finale.
I'm starting to love the yields on bonds. 3 month T Bill at 4+% is sweet. Hoping to continue collecting this sweet sweet guaranteed returns that I can ladder into.
I'm not sure about that.
My coworkers are arguing that a bunch of people are buying put options, effectively shorting the stock market, in the days prior to these FOMC meetings. At 2pm, the meeting notes come out, and we see that the expected .75% rate happened.
Since that was "expected", all the put options are now sold. That causes the stock market to jump up (since the effective-short positions are liquidated).
Its just a hedge, just in case the numbers come in and the Fed chooses like 1% hike or higher instead of the expected .75%.
Replace the Fed with an AI. They have a well defined objective function
Therefore, your down payment should be just as effective as it was before, particularly if it's enough to pay for much of the house and keep your monthly payment lower.
Scenario 0: 500k house, 30yr/3% interest rate, 100k down (20% standard) = 400k total loan amount and 1,686 monthly payment
Scenario 1: 400k house, 30yr/7% interest rate, 100k down (let's say you still have that cash and put it all towards down payment) = 300k total loan amount and 1,996 monthly payment.
This is assuming in your housing market prices have cooled by 20%, I'm not seeing drops like that in my market. Your monthly payment just increased $300.
https://www.businessinsider.com/housing-market-outlook-downt...
Disclaimer: I did get in when rates were in the low 3s. No clue what PMI is like nowadays or if it changes with the current rate environment.
reduce demand
it does suck being on the receiving end - I do sympathise - and I am simply making an observation
It's obviously still not advisable to buy a house if you can't afford the monthly payments, but remembering that you can always refinance in a couple years when the rates normalize might help if you have FOMO from the super low rates of the past few years.
There are always people who want or need to sell, even if people who bought high hold on to their homes.
Powell's speech doesn't matter at all until we see the results of midterms.
despite still being 10% above November 2021
and your people will say “we did it guys!”
Im not sure who you think 'my people' are... my people aren't in power and wont be for years. Remember, not all people live in the USA.
How do interest rate hikes fix that?
https://fred.stlouisfed.org/series/M1SL
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
use less and the prices will be falling
(This should be the new Deleuze meme.)
- When interest rates go up, the cost of borrowing goes up because you have to pay back more over time.
- When the cost of borrowing goes up people borrow less.
- When their is less borrowing their is less money in the economy. Less of a currency trying to purchase the same amount of goods lowers prices.
Say a company buys a $100k asset, and they can use it to generate $10k in revenue. That's a profitable investment at 5% interest ($5k), but not at 10% ($10k). So at high enough interest rates, it's not economically viable for that company to expand. That lack of expansion has upstream implications, and can have a cooling effect on asset prices at broad levels.
Borrowed money is rarely spent on food and gas.
You can be stupid and talk about buying food and gas on credit cards. Very few people in this country will stop buying food and gas to prevent default. People need food and gas to survive. So it's not really the borrowed money that is spent on food and gas.
That's the theory anyway, they don't say it in plain terms like that though.
People need food and gas to survive. They're not going to stop buying food and gas, unless they are dead.
Of course, whatever the Fed does may be counterbalanced by supply-side issues, whether economic or political; a warmer-than-expected winter moderating gas prices, or executive actions impeding investment into O&G raising prices, and so on; and other demand-side issues, such as more helicopter money sprayed against fixed supply.
By some measures, it's not even succeeding in inducing a recession. Demand isn't even necessarily declining - you would need a common sense explanation why the rate of increase in demand doesn't sometimes fluctuate or go down anyway, in the absence of fed action.
The Fed's tools are extremely effective at taking a huge shit on bond prices. They have huge financial impacts. But you are not giving me a common sense explanation for how raising interest rates will reduce the prices of food and gas.
It will not. The only way to reduce prices of oil/gas and fertilizers (for food) is to bring back the amount of oil/gas and ammonia that went offline due to Russia. There is no amount of digging anywhere in the world that will quickly replace this much lost natural resource.
What raising interest rates will do is cause less spending in all non-oil/gas goods and services. This means every other industry must expect a reduction in revenues because the average customer is going to be spending more on oil/gas and food.
In other words, the choices for companies are: be ok with reduced revenue or be ok with reducing prices.
The choices for individuals are: be ok with consuming less non-oil/gas/food things or sell assets to fund oil/gas/food things.
Brent has been in the $90s for a while now. That's equivalent to $65-$70 from ten years ago, which also wasn't a problem then. It's very modestly elevated at present.
Natural gas may be a different matter, although the Europeans look like they can have that permanently solved over the next few years through diversification and greater energy conservation.
At least this has a modicum of common sense to it.
As others have pointed out, oil prices fluctuate all the time though. So do food prices.
Gas can affect retail prices, because to me, common sense says, you use gas, not oil, to move food from wherever it is to the supermarket and into people's carts, back to their homes. And gas prices are not oil prices. And a lot of the price of many goods is, secretly, gas, because that is how the people get to where they work, how the goods that are otherwise useless without transportation get to where they're sold, etc.
> What raising interest rates will do is cause less spending in all non-oil/gas goods and services.
So what? The CPI, even the "core" CPI, is food and gas, or food and gas in disguise.
Even if you buy less clothing, a lot of the price of the clothes doesn't come from demand. It comes from the price of the gas used to move it from A to B and all the people involved moving it, and the price of the food to feed all the people who made it and sell it. Gas and food are hiding in all the inputs of clothes. There is a floor on the cost of clothes, it keeps rising, what exactly will increasing interest rates do to the rising (producer's) cost of clothes?
1. choice: The idea is that you can put your money in the bank and get some interest or you can spend it. So when interest rates go up, people will chose to spend less and save more. Obviously rates have to be higher than inflation which is now 10%, for this strategy to work, but at high enough rates, they will choose to save rather then spend. Less spending, demand falls, so prices should drop.
2. money supply: For the non-financial sector of the economy, money is created when households borrow from banks, and money is destroyed when loans are repaid. Increasing interest rates reduces loan growth and thus the money supply. A smaller money supply should lead to lower prices.
3. business investment: higher interest rates means that the cost of capital to firms goes up. They must earn a higher margin in order to service whatever debt they have at the higher rates, and investors can choose to invest in the business or buy a bond, and so the business has to earn a return at least as high as the bond. So higher interest rates means that ventures which would have been profitable at a lower rate are no longer profitable. So less business investment at higher rates.
Translates into, Less money for stock buybacks, less Yolo with stimy checks, left over money to yolo is also reduced == the market returns to mean. People feel less wealthy == slow purchases. Reduced purchases == Business struggle. Businesses lay people off == less demand. All of this == Less driving, less food.
Really very simple.
I don't think you are wrong intuitively. I am just trying to be a little more specific because get very vague about monetary policy and it leads to some bad assumptions.
But probably more importantly the increased cost of borrowing hits businesses which are living on the edge and have been rolling over short term loans at low interest rates. When that debt service triples then those unprofitable businesses will start facing negative cash flow losses and can be pushed into insolvency.
For just one example, look at all the commercial real estate vacancies in downtown SF and Portland. Behind a lot of that will be very cheap financing which will go under when interest rates rise (and it is all reasonably short-term financing because it had to be in order to get the lowest interest rates and keep the businesses barely treading water -- so think of this as ARM mortgages for business).
So you have reduced demand for anything funded by loans, along with businesses at the margins going under because their cost of borrowing increases. You get layoffs from the businesses going under which will remove demand for goods. The reduced demands for goods then filters through the system producing more layoffs and more reduced demands for goods across every sector and the economy contracts into a recession.
All the Fed does is raise the cost of borrowing money which causes enough businesses on the edge of failure to fail that it pushes the economy into a recession--amplified by all the positive feedback loops in the economy.
Honestly don't know why this is such a mystery to everyone or why the question needs to be a "meme", it is pretty straightforwards. The only tricky part might be understanding why failures of businesses on the margins could lead to an economic collapse, but you'd think that with the audience of engineering-oriented people here that we'd collectively understand positive feedback loops amplifying small changes into big ones.
Oh there's also purely subjective psychological positive feedback loops as well. Layoffs at FAANGs right now (or whatever they're called these days) is more due to forward expectations and those businesses getting a bit more runway for the recession. But by doing that they're helping to create the very recession that they're getting prepared for. Similarly in the middle of a recession businesses cut jobs and curb spending because they're in a recession, making the recession worse.
Yes, but prices are not demand, they are supply and demand. What if you shut down the parts of the economy that make food and gas?
For example, how do fed interest rates shut down the parts of Saudi's economy that makes oil?
Anyway, in your explanation, you do not use the words "food" or "gas" which is how the "CPI" is calculated.
> Honestly don't know why this is such a mystery to everyone or why the question needs to be a "meme", it is pretty straightforwards.
Using the words in the question to answer the question is "straightforwards."
Prices going down (Deflation) in a modern economy is very very very bad even if it's for Food and Gas. Since WW2 our economic system has been based on prices going up because that means people are producing goods to make money to spend it on goods. The real goal of these interest rate is to slow the rate of price increase because now there is less money available to borrow / print into the system. People / Businesses will now use debt less often to leverage their purchases which will slow down the economy. If prices increase too quickly the system burns itself alive. If prices lower it decays and dies.
So to answer your question prices will continue to rise because inflation will remain positive, however the rate of it will be lower.
The Fed can do that be damaging demand by damaging the labor market and reducing the value of assets (which also damages spending power ultimately in numerous ways).
There should be a lot more consideration given to increasing and improving on the production side right now, however the US is not nearly so skilled at that these days (whether industrially or policy wise). If you walk into your typical CVS or Walgreens and look at their empty baby formula section, it tells all. Supply chains are still a mess in the US.
The US knows how to drill for oil and frack. It would help curb inflation and help Europe deal with Russia.
What is the common sense explanation for how increasing interest rates reduce the extend of price increases of food and gas?
We have differing definition of common sense.
It will bring down housing, which is 1/3 of the CPI by weight and helps get the Fed's inflation metrics down. (Just as an example, it won't make as much sense to leverage up and buy 5 Airbnb's at higher interest rates.)
How does it reduce demand for gas?
This is what I mean.
Increasing interest rates increases the temptation to lend money instead of spending.
Why would people cut spending on food and gas? They need both to survive. That's what the CPI is made of.
This is complex.
Lower interest rates overall increase home prices, because people buy the biggest home they can afford on a monthly payment.
There are many kinds of cars. Some are cheap and some are expensive.
Anyway, how do interest rates make things like food and gas more expensive and out of reach? Those don't require financing. They're hugely impactful on inflation. You can be the Fed, and pretend there's a "core" CPI, but the people who make your clothes and cars need food and gas, your clothes are made with a lot of gasoline directly, via shipping and manufacturing, etc., so it is sort of a fiction that there is this non-food-and-gas CPI.
It reduces demand - in the modern world the prices are disconnected from cost of production - instead reflect the demand for that product - how much can it be sold for
Does it suck money out of the system? Here's a common sense example: Raising interest rates caused assets like stocks and bonds to decline in price. People sell these equities and now have cash they are willing to spend on more shit, specifically what is in the CPI. So the opposite can also happen.
Then it should be obvious why the Fed is doing a terrible job.
The simplistic version is one idea of the cause of inflation is there's too much demand for all goods as a whole in the economy because there's too much money floating around causing demand to push higher on the demand/supply curve because it's more expensive to produce more of something past a certain point. Making it harder to get loans decreases the money flowing in for some expenditures so there's less expansion in areas like hiring (which when we're near full employment like now usually means having to raise wages pushing costs up and injecting money into the more general market). Thus by increasing the cost of expansion you slow it down and cool the labor market and maybe even cause it to contract.
In the end it boils down to getting more people out of work so they can't buy as much and are willing to accept lower wages meaning it costs less to produce so you might meet the increased demand curve in the middle. It's an incredibly shaky way to try to run the economy but the government has limited knobs to turn and ideally it's easier to target relief at people put out of work because of this than it is to aid the entire population generally.
That's one theory I've heard explained at least. It's incredibly callous to me though because it depends on just putting people out of work and our safety nets in the US are extremely weak meaning you wind up with the fact that a 1 percentage point increase in the unemployment number is associated with a 1-1.6& increase in suicide rates. [0]
[0] https://www.healthaffairs.org/do/10.1377/hpb20220302.274862/....
