> Restoring price stability will take some time and requires using our tools forcefully to bring demand and supply into better balance. Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions.
The Fed has some tools, most notably the interest rate, that can probably slow down inflation but at the cost of probably slowing down growth. A big question has been the degree to which the Fed will give up growth in order to try to reduce inflation. This speech makes it sound like the Fed is likely to trade off a lot of growth in order to hit inflation targets.
What does that mean for most people? Probably bad things in the short term.
> While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.
It makes it sound like the Fed is willing to inflict some damage to hit its inflation target. This isn’t a change exactly, but it’s a confirmation about what lots of people have speculated might happen.
yeah, that's, colloquially, fed-speak for "don't make me turn this car around, I'll do it, so help me god".
What he's saying there is they're willing to crank interest rates even if it slows the economy down and pushes unemployment sky-high. The Fed's dual mandates are price stability and full employment and they've just signaled which horse they're gonna back.
This is the first time in living memory that we've seen a market where labor is valuable and has the upper hand in negotiations and the wealthy absolutely will not abide that.
Most of the problem is still pandemic-related supply shocks and supply chain bubbles, plus energy going nuts from the russia thing. It truly is transitory and not based on changes to long-term market fundamentals. But the needle was starting to move up on worker compensation/etc and they gotta put a stop to that, can't let the plebs get a taste for financial stability.
As if the workers don't care about inflation and it doesn't affect their financial stability? At the lower wage end these price increases are eating up all of their nominal wage growth and more. There is a reason this inflation has become such a major political issue, people are angry about it. So yes, slowing the economy will slow down business demand e.g. for oil and that will bring some stability to gasoline prices. Powell's wishlist I'm sure is that companies will be able to freeze wages and stop new hiring for a while but avoid mass layoffs. That may not work out but the conspiracist mindset is absurd.
And outside the lines, we have a demographic problem with fewer and fewer young people to juice the economy and provide the labor needed to meet expected return on assets that went into many decisions borrowing wealth from the future.
The fed during the 1970s brought down inflation for a little while, but it spiked again. The hope is that Powell has learned this lesson and will keep interest rates high enough for long enough to stop it from being more persistent.
But then you have those that argue that inflation is a bit more transitory and different than the 1970s, as it is more supply chain induced. And if we keep interest rates high for too long, it will hurt the economy, as cheap money isn't the cause of inflation.
Interest rate hikes will continue until inflation subsidies and interest rates will remain high after that.
"Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy"
Right, do not expect rates near 0 in the foreseeable future and as a follow on to that, mortgage rates will go up. So if you are locked in for 30 years with a mortgage purchased the last few years, you did well.
> So if you are locked in for 30 years with a mortgage purchased the last few years, you did well.
Unless prices go down and you end up losing a bunch of money (or worse, underwater).
That's the problem, rates and housing prices don't exist in isolation. People don't generally care about the actual sticker price of the house, they care about what the monthly payment is going to be, so lower interest rates imply willingness to bid higher... and the opposite is also true, higher interest rates mean people can't afford to bid as high and sale prices go down.
Essentially, people are locked in at higher principal/lower interest, but now the housing market is moving towards lower principal/higher interest, and that means that a huge amount of housing "net worth" (whether current or future) just evaporated for a lot of people. Your $300k house is now a $250k house again and you just lost all that money you spent years paying down (inflation ain't the only way for value to evaporate).
If interest rates double, then so does the interest portion of the mortgage for new homebuyers. It's not quite double, since some of the mortgage goes to principal, but it'll be almost double. And with the interest rate so low... it doesn't make much in "real terms" to make a big relative increase. I refi'd at... 2.75%? So if the fed raises interest rates from 0% to 2%, that nearly doubles my interest rate. Obviously I am not buying today but other people are, and that still determines the value of my asset.
I suppose it's the old "don't buy the house as an investment, buy it to lock in a rent that you can afford" but it's definitely been worrying me. Thankfully the last few years have put me far enough ahead that I'm not in any danger even with a big dip.
And I suppose the counterargument is that institutional buyers are still making big cash offers, so maybe there won't be that much of a dip. But without the hike, values would have gone higher, it's still a loss of expected value. And the institutional investors aspect of the market is really not a great thing either right now.
Yea, we don't know which way anything is going to go so it might end up being better to wait. As of now though, home prices haven't dropped much in many areas due to lack of supply. I think both positions have merit, but for a variety of reasons I think the lower rate home is the better position. And you also don't really “lose” money, but yes the house value on paper could go down from the historic highs.
"Volcker's Federal Reserve board elicited the strongest political attacks and most widespread protests in the history of the Federal Reserve (unlike any protests experienced since 1922), due to the effects of high interest rates on the construction, farming, and industrial sectors, culminating in indebted farmers driving their tractors onto C Street NW in Washington, D.C. and blockading the Eccles Building. US monetary policy eased in 1982, helping lead to a resumption of economic growth"
I think the key take aways are as follows. Prerequisite is the understanding that the Fed has a mandate to: maximize (productive?) employment, and maintain inflation at 2%.
- Employment is very high, as it stands. The intention of easy money was to maintain purchasing power, and prevent household shocks due to government shutdowns during the pandemic. It is being used by companies to game the market, and win as evidenced by this change, producing demand-side inflation.
- Productivity is low, as measured presumably by per-capita GDP projections. Indicating continued economic dislocations between prices and corporate activities. Investments are concentrating into unproductive sectors. Capital inflows aren't improving productivity, so the cost of productivity is going up -- supply-side inflation.
- Households and businesses are still gobbling up a lot of debt OR a lot of savings, spurred on by USD inflation -- to employ those individuals, to live outside reasonable means -- or preparing "for the worst." This is the manifestation of the K-shaped recovery, where activities are significantly altered, in anticipation of near-term economic changes. Acquisitions probably would highlight this, but the branches of government have talked FAANG out of this but Broadcom-VMWare highlights a counterexample.
The narrative that is latched onto by investors pertains to the Fed's intention to hike rates until employment begins to fall, he states that they're planning on "overshooting" the fed-funds rate, so that business investment will fall, and concentrate onto more reliable business-models. Jerome Powell also invoked Paul Volkert, basically to signal that risk assets are no longer a key-metric being observed.
When Google ripped Microsoft a new Chrome, this was supposed to free up some gears, and it did -- because of under-investment in employees at the time, and the malleability of software it was all soft goods.
Bottom line, the product improved.
When Zillow rips the housing sector an expensive and unfunded demand for renovation -- this is where the "growth" investment thesis starts to break down, a massive acquisition of hard goods, made possible because of risk-asset price inflation.
Bottom line, the product is worse for the foreseeable.
It's icky, but thankfully these types of radioactive business models are getting identified sooner rather than later.
I asked OpenAI to write it as an "explain like I'm five":
[edit: which according to a comment below is a mix of copy paste and a 180 degree misreading, lol. I'd be curious if the synopsis would be better had I pasted his remarks rather than passed a link in, but I'm not at my desk to try rn.]
The Federal Reserve is responsible for ensuring that the economy is stable and that inflation is low. In order to do this, they use a number of tools, one of which is interest rates.
When the economy is doing well, the Fed will raise interest rates in order to prevent inflation from getting too high. When the economy is not doing well, the Fed will lower interest rates in order to encourage spending and help the economy grow.
The Fed has been keeping interest rates low for a while now because the economy has not been doing well. However, as the economy has begun to improve, the Fed has been slowly raising interest rates.
In his speech, Powell said that the Fed plans to continue to raise interest rates slowly as the economy continues to improve. However, he also said that the Fed is prepared to lower interest rates again if the economy begins to slow down.
Unsurprisingly, the first part is apparently copy pasted from an intro macroeconomics text and the second half is exactly the opposite of what Powell said.
The fed is going to try to put the economy into a recession by jacking up rates in the hopes that it eviscerates demand which will (maybe, but I don't think so) bring inflation down by balancing supply and demand. Fun times.
He said, "We're going to jawbone a lot about inflation and make some token steps, but not actually do what will solve the issue. Who do you think I am, Paul Volsker? We're in debt trap and more worried about springing the trap than about persistent and high inflation. Don't worry, young whippersnapper, in the future you'll own nothing and you'll be happy!"
