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US Federal Reserve raises interest rates for first time since 2018

theguardian.com

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Re: US Federal Reserve raises interest rates for first time since 2018

#671

Post by MR4D »

lastofus wrote: post #115
MR4D wrote: post #65

Earlier quoted context omitted.

It’s even worse - if the Fed actions tank the markets, then millions of retirees who have been enjoying high market values are screwed and have no other source of wealth or income. I do not envy the position the Fed is in.

A typical retiree portfolio should have a significant portion in bonds (or more likely, bond funds). Initially this will hurt, but over time, higher rates mean higher bond returns Equity markets can take a hit at pretty much any time for completely unforeseen reasons. This is expected and should be factored into a "safe" withdrawal rate (see Bill Bingham and the 4% rule). Anyone who was relying on an equity market th…

Two thoughts on this:

1 - holding bonds versus bond funds are very different, as in the first case, you control the timing of the sale, and in the second, the fund does. That has all sorts of implications about losses (as well as capital gains) in any particular year.

2 - Interest rates have been at zero (ignoring this week's interest rate hike). Using the Barclay's Agg duration of 6.7 (as of this week), then you are just asking for pain in your bond holdings. Stocks may or may not go up or down, but bonds are either going to go down or generate basically zero cash flow. Many people have embraced TINA as a result. [0]

[0] - https://www.ellevest.com/magazine/investing/tina-alternative....

Re: US Federal Reserve raises interest rates for first time since 2018

#672

Post by adam_arthur »

gruez wrote: post #666
adam_arthur wrote: post #582

Earlier quoted context omitted.

On point one, CPI uses a combination of "owners equivalent rents" and more traditional rent measures. Owner's equivalent rent is basically just a survey where they ask homeowners how much they could rent their house for. So survey participants understanding of market rents may lag. But more importantly, when they survey renters, they ask them what they're currently paying. So if somebody is in a one year lease, and g…

>But the whole value of CPI is to be a forecasting tool Forecasting tool for what? Prices? Everything about the CPI is about measuring price changes that already occurred, not to forecast future price rises. If the price of widget goes up 10% year after year, that's all CPI is going to report. It's not going to report what the price of widgets are 10 years from now. If you want inflation forecasts, you look at TIPS s…

You ask me about the methodological "issues" then immediately turn around to defend them... Kind of odd. If you really felt so strongly about this, wouldn't you have already been aware?

The CPI is the primary tool the Fed uses to set policy, policy whose effect has a multi month lag of its own. So by using backwards looking metrics, we severely impair the ability of the fed to set appropriate policy in a timely manner.

If you think the backwards looking metric is still useful, then the Fed should create a new metric based off current market rates, and use that instead. it's intellectually dishonest to defend using backwards looking metrics in the CPI methodology as a forecasting tool for Fed policy. The current methodology clearly masks the actual current market rates for rent.

Including rent controlled units tells us nothing of inflation, by definition. So why does the Fed consider these?

Example: it took a whole year for inflation to be acknowledged as a problem, and rents have barely shown up in it at this point. There are a few percentage points higher on CPI to come from rent alone (assuming other factors stay constant)

Using current market rates is not forecasting anything, it's telling you what rents are today. Using rents from a year ago is backwards looking, pretty obviously. It's a current snapshot of what people are paying, not what price levels are. Which is a fairly useless metric, as the the intent of Fed policy is to influence market pricing, and the biggest use case for the CPI is to provide datapoints to help forecast the path of inflation.

Re: US Federal Reserve raises interest rates for first time since 2018

#673

Post by projektfu »

jmalicki wrote: post #261
cjsplat wrote: post #235

Earlier quoted context omitted.

I can't repro the 45% number. BEA says 2021 US GDP is nearly $23T, CBO says total 2021 budget is $6.8T.

Federal budget is $6.8T, the 45% includes state and local government spending as well. https://fred.stlouisfed.org/graph/?g=8fX https://en.wikipedia.org/wiki/Government_spending_in_the_Uni... .

OK, that says 20% federal + 17% state/local, and that state/local is about 45% of all government expenditures.

In other words, it's 37% and not 45% of GDP.

Re: US Federal Reserve raises interest rates for first time since 2018

#674

Post by gruez »

adam_arthur wrote: post #672
gruez wrote: post #666

Earlier quoted context omitted.

>But the whole value of CPI is to be a forecasting tool Forecasting tool for what? Prices? Everything about the CPI is about measuring price changes that already occurred, not to forecast future price rises. If the price of widget goes up 10% year after year, that's all CPI is going to report. It's not going to report what the price of widgets are 10 years from now. If you want inflation forecasts, you look at TIPS s…

You ask me about the methodological "issues" then immediately turn around to defend them... Kind of odd. If you really felt so strongly about this, wouldn't you have already been aware? The CPI is the primary tool the Fed uses to set policy, policy whose effect has a multi month lag of its own. So by using backwards looking metrics, we severely impair the ability of the fed to set appropriate policy in a timely manne…

> You ask me about the methodological "issues" then immediately turn around to defend them... Kind of odd. If you really felt so strongly about this, wouldn't you have already been aware?

Because I want to understand your position before arguing against it, rather than imagine what your arguments are and putting them in your mouth.

>The CPI is the primary tool the Fed uses to set policy, policy whose effect has a multi month lag of its own. So by using backwards looking metrics, we severely impair the ability of the fed to set appropriate policy in a timely manner.

It'll be nice if we had a forward looking metric, but that changes nothing about what the CPI is. The BLS publishes the methodology and/or goals of the CPI, so the fact that it's not forward looking isn't some sort of secret.

>If you think the backwards looking metric is still useful, then the Fed should create a new metric based off current market rates, and use that instead.

AFAIK they use a combination of present data + expert predictions to base their decisions. Using "current price for rent/housing" CPI might make it forward looking for rent/housing, but it does nothing for other components (eg. energy/food), because those prices aren't locked in for consumers. If you actually want a forward looking metric, your best bet are financial instruments linked to CPI and/or prediction markets.

> it's intellectually dishonest to defend using backwards looking metrics in the CPI methodology as a forecasting tool for Fed policy. The current methodology clearly masks the actual current market rates for rent.

I don't get it, is the CPI supposed to be the end all be all metric for interest rate policy? I don't think that's a position that I expressed, nor is something the fed holds.

>Including rent controlled units tells us nothing of inflation, by definition. So why does the Fed consider these?

>Example: it took a whole year for inflation to be acknowledged as a problem, and rents have barely shown up in it at this point. There are a few percentage points higher on CPI to come from rent alone (assuming other factors stay constant)

>Using current market rates is not forecasting anything, it's telling you what rents are today. Using rents from a year ago is backwards looking, pretty obviously. It's a current snapshot of what people are paying, not what price levels are. Which is a fairly useless metric, as the the intent of Fed policy is to influence market pricing, and the biggest use case for the CPI is to provide datapoints to help forecast the path of inflation.

I think the problem here is that rent, unlike most things, have their prices locked in months/years in the past. This is unlike most other things in the CPI. You don't lock in your gas prices 6 months in the past, nor do you lock in your supermarket bill. While it's true that prices in the present will eventually be paid by someone in the future, they're also not reflective of what the average american is actually paying today. If you use current prices for some goods, plus current prices for rent (rather than whatever BLS is doing now), then the CPI becomes a weird mix of current + future prices. Imagine a commodities index that is composed of 5 year futures for crude, 3 year futures for wheat, and spot prices for natural gas. What would that even represent?

Re: US Federal Reserve raises interest rates for first time since 2018

#675

Post by adam_arthur »

gruez wrote: post #674
adam_arthur wrote: post #672

Earlier quoted context omitted.

You ask me about the methodological "issues" then immediately turn around to defend them... Kind of odd. If you really felt so strongly about this, wouldn't you have already been aware? The CPI is the primary tool the Fed uses to set policy, policy whose effect has a multi month lag of its own. So by using backwards looking metrics, we severely impair the ability of the fed to set appropriate policy in a timely manne…

> You ask me about the methodological "issues" then immediately turn around to defend them... Kind of odd. If you really felt so strongly about this, wouldn't you have already been aware? Because I want to understand your position before arguing against it, rather than imagine what your arguments are and putting them in your mouth. >The CPI is the primary tool the Fed uses to set policy, policy whose effect has a mul…

By that logic we should use car payments from cars bought 5 years ago instead of car prices today. Why doesn't CPI do this?

We should use mortgage payments from house bought 10 years ago, not estimates of current rents.

If I buy 100lbs of canned goods from Costco 10 years ago, we should use that pricing instead of current price of canned goods too.

If you are arguing that using backwards looking rent levels make sense, surely you must agree with these changes too, which are 100% logically consistent with that viewpoint? Otherwise you are just being intellectually dishonest

To say that CPI reflects prices paid over market rates is not even accurate because we don't measure fixed costs for most goods in the CPI, only current pricing. Rent is the only exception, where methodology is not aligned with current market pricing.

The Fed uses CPI as their primary tool for gauging inflation yes, among many other factors such as labor market tightness and so on. Core PCE specifically. Their entire inflation target is built around this as a metric, if you weren't aware.

Why you feel the need to defend it is beyond me. Clearly from a pure statistical sense, using backwards looking data to assist with forecasting is statistical nonsense. You can try to compensate for the flawed metric, with your own forecasting, but why not fix the metric to begin with?

But think whatever you like. I can't respect your view unless you agree that we should use lagging factors across the board to make measurement methodology consistent. Otherwise what is even driving your view? Bias?

What you're describing is a consumer expense index, not what I would think of as a consumer price index. And looking at locked in expenses from the past is largely useless from a monetary policy perspective.

Re: US Federal Reserve raises interest rates for first time since 2018

#676

Post by refurb »

odonnellryan wrote: post #662
refurb wrote: post #520

Earlier quoted context omitted.

The recency bias is amazing. No, if interest rates go up, buyers can afford less, housing prices go down.

You're just being silly. Just look at the data: https://inflationdata.com/articles/wp-content/uploads/2021/1... It is easy to see that even during insane rates (80s etc) housing prices didn't collapse. They went down a little, but only after adjusting for inflation. :)

The inflation adjustment hides the magnitude of the changes but you may also realize the prices haven’t gone up nearly as much in 1980.

Re: US Federal Reserve raises interest rates for first time since 2018

#677

Post by refurb »

odonnellryan wrote: post #663
refurb wrote: post #577

Earlier quoted context omitted.

It's not guaranteed and in fact, what you'll likely see is continued home price growth as people pile in the "now or never" mentality as rates increase and mortgages are harder and harder to get a the historic low rates (see Canada). But in the long run, when mortgage rates go from 3% to 6% affordability goes down - people buy based on monthly payments, not the size of the loan. Of course if wages drastically increas…

Obviously it is not guaranteed bro. We only have history to base these assumptions on. The history backs the fact that housing prices will not go down - unless there is another major issue like the fraud during 2008, which seems unlikely but not impossible. Nothing is a guarantee. Silly to base your argument on that. Nothing is for certain.

Huh? Housing prices crashed several times before 2008.

This is the same mentality of 2008. Wave your hands around and say "it's different this time".

No, it's not. Housing is cyclical. It goes up, it goes down. It will go down, but but amazingly many will claim "I never saw it coming".

Re: US Federal Reserve raises interest rates for first time since 2018

#678

Post by boppo1 »

MatteoFrigo wrote: post #418
boppo1 wrote: post #283

Earlier quoted context omitted.

> The bond market is doing the rate cuts for them. Can you elaborate? I don't understand.

I am not the person you are replying to, but perhaps the cleanest indication of what "the bond market" "thinks" is to look at the Eurodollar futures quotes at https://www.cmegroup.com/markets/interest-rates/stirs/eurodo... It is hard to define exactly what a "Eurodollar" is, but for now assume that a Eurodollar is a bank deposit in a jurisdiction not subject to the Fed's authority. ("Eurodollar" has nothing to do wit…

>used to be larger than the Treasury bond market until Congress fixed the problem

I remember hearing about that. How did they pull that off?

Re: US Federal Reserve raises interest rates for first time since 2018

#679

Post by gruez »

adam_arthur wrote: post #675
gruez wrote: post #674

Earlier quoted context omitted.

> You ask me about the methodological "issues" then immediately turn around to defend them... Kind of odd. If you really felt so strongly about this, wouldn't you have already been aware? Because I want to understand your position before arguing against it, rather than imagine what your arguments are and putting them in your mouth. >The CPI is the primary tool the Fed uses to set policy, policy whose effect has a mul…

By that logic we should use car payments from cars bought 5 years ago instead of car prices today. Why doesn't CPI do this? We should use mortgage payments from house bought 10 years ago, not estimates of current rents. If I buy 100lbs of canned goods from Costco 10 years ago, we should use that pricing instead of current price of canned goods too. If you are arguing that using backwards looking rent levels make sens…

> By that logic we should use car payments from cars bought 5 years ago instead of car prices today. Why doesn't CPI do this?

>If I buy 100lbs of canned goods from Costco 10 years ago, we should use that pricing instead of current price of canned goods too.

Well wikipedia says it's something that economists are "torn" on[1], so maybe they actually should be doing it for consistency reasons! Searching around it looks like the bank of canada[2] and the imf[3] considered doing just that.

Also, apparently the whole reason the adjustment was put in place was because academics complained that the CPI was too biased in the upwards direction[4]

>We should use mortgage payments from house bought 10 years ago, not estimates of current rents.

1. Given that mortgage payments are fixed and housing prices have went up in the past decade, this approach would probably underestimate compared to OER

2. it still doesn't solve the issue that houses (or more specifically land), is an asset, not something you consume (the "C" in CPI).

>If you are arguing that using backwards looking rent levels make sense, surely you must agree with these changes too, which are 100% logically consistent with that viewpoint? Otherwise you are just being intellectually dishonest

Bold of you to assume that I'd disagree with it ;)

>To say that CPI reflects prices paid over market rates is not even accurate because we don't measure fixed costs for most goods in the CPI, only current pricing. Rent is the only exception, where methodology is not aligned with current market pricing.

Of the other goods in the CPI, how much % are durable goods? Of those, how long do people typically own those goods for? For instance, I agree that in in theory it's worth factoring this in for smartphones, but they make up such a small part of people's spending, and the time span is so limited (~2-3 years?) that it's not worth factoring it. This is as opposed to a house that costs hundreds of thousands of dollars, and people own for decades. In other words, maybe the inconsistency is there because they only bothered to adjust the biggest factor?

>The Fed uses CPI as their primary tool for gauging inflation yes, among many other factors such as labor market tightness and so on. Core PCE specifically. Their entire inflation target is built around this as a metric, if you weren't aware.

No, you're missing the fact that they have experts interpreting the metrics. They're not just applying some rule like "if inflation > 3 then raise interest rates". That's why there was the whole "transitory inflation" thing a few months ago even though inflation was way above the target. Given that, unless you think the experts there are totally incompetent and don't have this factored in, I don't see how it's really an issue. Presumably it's baked into their models already.

>Clearly from a pure statistical sense, using backwards looking data to assist with forecasting is statistical nonsense.

I agree that the adjustments are basically a smoothing function that make the CPI more "backwards", but removing it doesn't magically make the CPI not backwards looking. It's backward looking by definition. It's recording chicken prices collected last month. If you want forecasts the CPI is not it. You'll have to get them yourself (ie. experts and/or markets). See also "transitory inflation" from last paragraph.

>But think whatever you like. I can't respect your view unless you agree that we should use lagging factors across the board to make measurement methodology consistent. Otherwise what is even driving your view? Bias?

>What you're describing is a consumer expense index, not what I would think of as a consumer price index. And looking at locked in expenses from the past is largely useless from a monetary policy perspective.

I'll have to concede that CPI literally says "price", so therefore technically speaking you're right that it should consists of price first and foremost. That said, you failed to answer my question from last comment. If you had a commodity price index consists of a random assortment of future prices (of varying lengths) plus spot prices, is that something that people want? It seems at least somewhat reasonable to adjust the prices from the index so that they're all for the same time period, even if that did mean it wasn't following the "real" prices.

[1] https://en.wikipedia.org/wiki/Consumer_price_index#Owner-occ...

[2] https://www.bankofcanada.ca/wp-content/uploads/2015/11/boc-r...

[3] https://www.imf.org/~/media/Files/Data/CPI/chapter-2-concept... search for "durables"

[4] https://www.bls.gov/opub/btn/volume-1/pdf/consumer-price-ind...

Re: US Federal Reserve raises interest rates for first time since 2018

#680

Post by AnthonyMouse »

gruez wrote: post #640
lupire wrote: post #576

Earlier quoted context omitted.

Somehow the Red "cut the taxes and spending" never give back the net inflows they take from Blue states.... Blue states have higher taxes to care for their citizens so they have to take less in Federal handouts.

But that's not how the federal government is supposed to work? The whole point is for them to engage in redistributive policies, which means you inevitably have "never give back the net inflows they take". I'm sure economically unproductive areas (eg. rural areas) "never give back the net inflows they take from" economically productive areas (ie. major cities), but we don't give people living in cities a tax credit.

This also points to a weird but true situation: Many blue states would be financially better off (or at least neutral) to eliminate federal programs and replace them with state programs, because the smaller the federal budget, the smaller the net outflow from blue cities.

But then they weirdly push for the opposite to the financial detriment of their own constituents, including the lower income ones who could have higher state benefits than existing federal benefits if the feds weren't taking so much of their state's money.

Best guess for why this happens is that the blue team is more captured by government sector lobbyists at the federal level, who don't want to lose jobs to state level government workers.

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