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Fed hikes rates as inflation worries push up bond yields

reuters.com

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Re: Fed hikes rates as inflation worries push up bond yields

#31

Post by almost_usual »

kadoban wrote: post #7
leptons wrote: post #3

Earlier quoted context omitted.

This comment isn't helpful. Please explain for those of us without a degree in economics.

Inflation is high, so interest rates need to go up to try to slow that, but the economy isn't doing amazing already, and higher interest rates won't help that. Not to mention the US debt is _high_ as hell and bond yields mean that's more expensive. And the country is run by a broken fool who has no interest or ability to fix any of that.

Long term bond yields are not directly tied to the Fed funds rate.

The problem is the debt purchased by the Fed during QE had extremely low yields (COVID era) the reserves held by banks created by the Fed during QE now cost more to service by the Fed.

Re: Fed hikes rates as inflation worries push up bond yields

#32

Post by Edman274 »

leptons wrote: post #3
bwb wrote: post #2

Get ready for a fun ride my friends :) Fun ride = Oil is going up, possibly for a long time, which will have a big inflationary effect on everything. And it appears the USA government has lost the conflict it started and effectively given control over key oil delivery channels to Iran. Not to mention Saudia facing real issues from rebel groups / Yemen (simplification). Government debt is high in several key economies…

This comment isn't helpful. Please explain for those of us without a degree in economics.

Stagflation is when the economy stagnates yet inflation is higher than ideal. Inflation and economic activity are typically correlated, and the conventional wisdom back in the day was that you couldn't have unemployment going up and things costing more, because it was expected that demand going down puts a downward pressure on prices. When people aren't hiring and buying but things cost more and more, life just kind of sucks. The last time this happened was in the 1970s in the aftermath of a few oil embargoes that made oil prices go through the roof and a disastrously expensive failed war in Vietnam, there was gas rationing, it sucked.

You may notice a few key similarities now with oil embargoes, reduced hiring, an extremely expensive war, and rapidly expanding government debt as a result of that war. If you want a qualitative feeling about people's moods in the 70s, you can watch such movies as:

Taxi Driver The Deer Hunter The Warriors Americathon Network

Re: Fed hikes rates as inflation worries push up bond yields

#33

Post by adventured »

andy_ppp wrote: post #23

So, during the Great Depression who ended up doing well? What can be applied to today?

There isn't going to be a great depression.

The US is going to debase itself endlessly through spend-print-spend-print. At some point they may load up enough debt that the economy suffers a gradual heat death, in the style of Japan, wherein too much of your national capital is going to debt maintenance, sitting in a low yield blackhole sucking the dynamism out of your system (instead of going to productive use, business expansion, R&D, et al).

There's absolutely nothing particularly interesting or special about the direction the US is going. It's very, very, very easy to see what's coming and has been for ~20 years (since Bush nearly doubled the size of the Federal Government and blew up our finances with simultaneous tax cuts + massive spending expansion, we've never turned back from the bleed).

Gold has gone up ~10x since the early Bush years precisely because of the USD debasement, that's the reduction in value in the dollar being represented in the ultimate store of value. All of it has been remarkably predictable. I've been chirping about it forever here and there's nothing special about my insight either, this stuff is plain as day national econ 101.

Re: Fed hikes rates as inflation worries push up bond yields

#34

Post by darth_avocado »

iamnothere wrote: post #9
leptons wrote: post #3

Earlier quoted context omitted.

This comment isn't helpful. Please explain for those of us without a degree in economics.

Higher rates means financing/borrowing is more expensive. Mortgage rates will go up, possibly pushing home prices down. This is neutral for buyers because of higher rates, but bad for sellers. Loans (personal or business) will be harder to come by. Layoffs, or at least hiring freezes, are more likely. Companies will move into a defensive rather than an growth mode. Higher unemployment will lead to more desperation, a…

Mortgage rates are not decided by the fed rate as much as they are by the bond yields. There’s a reason why the mortgage rates were above 7% yesterday even when the fed rate has been stable for a while.

This rate hike is aimed to stabilize the bond yields which in turn will lower the mortgage rates.

Re: Fed hikes rates as inflation worries push up bond yields

#35

Post by ThunderSizzle »

darth_avocado wrote: post #20
bwb wrote: post #2

Get ready for a fun ride my friends :) Fun ride = Oil is going up, possibly for a long time, which will have a big inflationary effect on everything. And it appears the USA government has lost the conflict it started and effectively given control over key oil delivery channels to Iran. Not to mention Saudia facing real issues from rebel groups / Yemen (simplification). Government debt is high in several key economies…

This is the right move. Inflationary pressures due to high oil prices and tariffs are not going away anytime soon. All the economic numbers point to a need for a rate hike. Not doing so has a much larger effect on the financial system than a 25 bps rate hike. Stagflation is a bigger risk to the economy. Counterintuitively the rate hike can help lower things like mortgage rates by stabilizing the bond yields.

We'll continue through the depression we've started since 2008. (GDP growth should be closer to 3.5%-5%, but we haven't really escaped sub-2% since 2008) - our GDP has been depressed by at least 1-2% growth since that crisis, and I think a large part of it has been the inflationary cycle we started and never stopped.

The wars already put us into too much debt, Obama continued it for 8 years (granted, the deficit slowly went down, but it wasn't fixed). Trump and Biden did a huge disservice to the debt (but neither really cared much about it), and now I fear the path Bush, Obama, Trump, and Biden have laid will not be easily fixed.

Re: Fed hikes rates as inflation worries push up bond yields

#37

Post by tedggh »

iamnothere wrote: post #9
leptons wrote: post #3

Earlier quoted context omitted.

This comment isn't helpful. Please explain for those of us without a degree in economics.

Higher rates means financing/borrowing is more expensive. Mortgage rates will go up, possibly pushing home prices down. This is neutral for buyers because of higher rates, but bad for sellers. Loans (personal or business) will be harder to come by. Layoffs, or at least hiring freezes, are more likely. Companies will move into a defensive rather than an growth mode. Higher unemployment will lead to more desperation, a…

“Higher rates means financing/borrowing is more expensive. Mortgage rates will go up,…”

This is highly inaccurate. The 10 year US treasury is a better metric for predicting mortgage rates. We saw this during the past interest rate cuts, interest for loans and mortgages still went up, remember? I do, because I was borrowing at the time. And why was that? Because the 10-year treasury continued going up, and that matters more than short term interest rates. The 10-year treasury is about expectations about the future, so we need to look at how the market responds before screaming mortgage rates will go up, they could actually go down.

Re: Fed hikes rates as inflation worries push up bond yields

#39

Post by almost_usual »

darth_avocado wrote: post #16
TrainedMonkey wrote: post #6

Earlier quoted context omitted.

Higher rates means USG will need to print more money to pay for $40TN debt which will increase inflation which will force higher rates.

The debt is owed by the treasury, fed prints the money. What you’re describing is not how the monetary system works.

The Fed purchased Treasury securities during COVID QE. Those securities had low yields and cash reserves were created during those purchases.

Those cash reserves are held by banks which the Fed funds rate pays interest on (what was hiked).

Meanwhile the fixed rate debt from QE remains the same.

Re: Fed hikes rates as inflation worries push up bond yields

#40

Post by bwb »

darth_avocado wrote: post #20
bwb wrote: post #2

Get ready for a fun ride my friends :) Fun ride = Oil is going up, possibly for a long time, which will have a big inflationary effect on everything. And it appears the USA government has lost the conflict it started and effectively given control over key oil delivery channels to Iran. Not to mention Saudia facing real issues from rebel groups / Yemen (simplification). Government debt is high in several key economies…

This is the right move. Inflationary pressures due to high oil prices and tariffs are not going away anytime soon. All the economic numbers point to a need for a rate hike. Not doing so has a much larger effect on the financial system than a 25 bps rate hike. Stagflation is a bigger risk to the economy. Counterintuitively the rate hike can help lower things like mortgage rates by stabilizing the bond yields.

Definitely the right move, 100% agree.

I don't think that mortgage rates are going to go down; I think they will go up. Just my opinion.

I also think oil is about to go up even more, maybe for multiple years, which is going to be inflationary on everything we do. But, could be really good for solar growth, electrification, and electric cars.

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