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Fed increases target rate to 3.75-4.00%

federalreserve.gov

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Re: Fed increases target rate to 3.75-4.00%

#141

Post by HPsquared »

apropos_g wrote: post #129
HPsquared wrote: post #127

Earlier quoted context omitted.

Money circulates between people. Person A takes out a loan and pays person B to do some work. Person B buys food and gas with the money.

Person A stops paying person B. Is person B going to stop buying food and gas?

I suppose he could barter for it.

If person A holds on to the borrowed cash and doesn't spend it, that money doesn't circulate (the velocity of money decreases).

If person A doesn't take the loan, there is less money in the system (money supply is reduced).

If there's less money circulating, people won't "bid-up" the prices of food and gas as much, reducing their price (assuming constant supply of food and gas).

Re: Fed increases target rate to 3.75-4.00%

#142

Post by yongjik »

apropos_g wrote: post #128
yongjik wrote: post #122

Earlier quoted context omitted.

Oh, but people will stop buying so much food and gas, just not directly. Without enough money, some people will cancel their planned trip to Hawaii. That's a lot of gas not burning right there. Or they won't buy another TV, which needs gas to be delivered to your home. With less people competing for precious gas, its prices drop.

> Without enough money, some people will cancel their planned trip to Hawaii. By this logic, why doesn't Congress illegalize travel? Is that going to reduce the cost of travel? Will that reduce CPI, which measures prices, not demand? > Or they won't buy another TV, What if we illegalized buying TVs? Would that make TV prices fall? You think that is going to reduce CPI? I'm not saying your explanation here is stupid.…

> > Without enough money, some people will cancel their planned trip to Hawaii.

> By this logic, why doesn't Congress illegalize travel? Is that going to reduce the cost of travel? Will that reduce CPI, which measures prices, not demand?

Hey, you asked for a "common sense explanation" how the policy works, and people gave it to you. If your intention was "I want to debate unrealistic what-ifs with as many people as possible," then you could have made yourself clear in the first question.

Re: Fed increases target rate to 3.75-4.00%

#143

Post by lamontcg »

apropos_g wrote: post #132
lamontcg wrote: post #130

Earlier quoted context omitted.

They're increasing the cost of borrowing, which directly affects the cost of loan financing for something like a car or a house. 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…

> 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. 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, i…

When people are fired from their jobs they no longer have money to spend, they don't take that trip to Disneyland this year (or whatever) and that shows up as reduced airline trips and miles driven, which impacts gas prices. Similarly because they're not buying as much consumer stuff that impacts deliveries. Businesses tighten spending which means less B2B stuff being bought which reduces manufacturing demand (and deliveries). That all drops demand for all kinds of energy and petroleum products.

I didn't mention the words "food" or "gas"[*] because I thought it was obvious, this stuff is really, really basic economics. The economy is all connected, so someone's contraction in spending is another market participant's contraction in demand--and as businesses see a contraction in their demand they adjust to contract their own spending.

When it comes to food, people contract their spending by starting to make coffee at home or just buy starbucks less often as a splurge rather than a daily thing, so that contracts revenue for starbucks, that leads to layoffs, which leads to less consumer spending, etc. The prices of staples don't usually drop as much because people still need to eat, but with reduced energy and transportation costs the supermarkets can reduce the cost of milk to try to attract customers.

[*] Actually on re-reading I did mention food and gas: "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." And "every sector" really means literally every sector of the economy--including "food and gas".

Re: Fed increases target rate to 3.75-4.00%

#144

Post by afiori »

apropos_g wrote: post #111
willcipriano wrote: post #15

Earlier quoted context omitted.

More expensive credit to businesses leads to less investment and growth leading to less hiring leading to higher unemployment. Higher unemployment means some people won't be able to afford food and gas lowering the demand for food and gas. That's the theory anyway, they don't say it in plain terms like that though.

> Higher unemployment means some people won't be able to afford food and gas lowering the demand for food and gas. People need food and gas to survive. They're not going to stop buying food and gas, unless they are dead.

I people are not on a fixed immutable diet and routine.

I would not put instant ramen and a steak in the same "food to survive" category.

Re: Fed increases target rate to 3.75-4.00%

#145

Post by miamibre »

apropos_g wrote: post #4

"I am once again asking for" a common sense explanation for how increasing interest rates will reduce the prices of retail food and gas. (This should be the new Deleuze meme.)

I think a lot of people aren't approaching the problem correctly.

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.

Re: Fed increases target rate to 3.75-4.00%

#146

Post by NegativeLatency »

apropos_g wrote: post #111
willcipriano wrote: post #15

Earlier quoted context omitted.

More expensive credit to businesses leads to less investment and growth leading to less hiring leading to higher unemployment. Higher unemployment means some people won't be able to afford food and gas lowering the demand for food and gas. That's the theory anyway, they don't say it in plain terms like that though.

> Higher unemployment means some people won't be able to afford food and gas lowering the demand for food and gas. People need food and gas to survive. They're not going to stop buying food and gas, unless they are dead.

Well the US isn't setup for it in most places but in larger cities it is possible although sometimes less convenient to take transit or bike, so I don't think people "need" gas to survive.

Re: Fed increases target rate to 3.75-4.00%

#147

Post by bern4444 »

dragontamer wrote: post #139
bern4444 wrote: post #92

Earlier quoted context omitted.

The answer from the meeting was effectively, "we don't know". 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 ban…

> 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. 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 "expect…

I don’t think “A bunch of people” could affect the entire market like that even with derivatives unless it’s including substantial institutional investors.

Maybe a single stock but not the entire market.

I see this as, everyone bought on the news that the fed would begin tampering down rate hikes in the near future.

Powell spoke and said we remain committed to getting inflation down and will continue to do what is necessary.

All the buying switched to selling and the market plopped.

Re: Fed increases target rate to 3.75-4.00%

#148

Post by whimsicalism »

wcarss wrote: post #93
whimsicalism wrote: post #46

Earlier quoted context omitted.

> Real inflation seems to be due to price gouging by companies 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.

It wasn't said that corporations were good but now are not, and it is not a requirement for the above to be relevant or true. 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…

The straightforward solution is that measurable surging consumer demand in durable goods allowed firms to set higher prices.

Your theory around sticky prices doesn't explain firms running out of things despite keeping increasing inventory.

Certainly, prices can be sticky and may be less sticky during the pandemic but firms still have to compete with each other on cost.

Re: Fed increases target rate to 3.75-4.00%

#149

Post by monkeydreams »

apropos_g wrote: post #132
lamontcg wrote: post #130

Earlier quoted context omitted.

They're increasing the cost of borrowing, which directly affects the cost of loan financing for something like a car or a house. 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…

> 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. 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, i…

Lamontcg offered you the simple explanation of why interest rate management is used to manage inflation. They didn't muddy the waters by talking about market distortions and why it is best to minimalise these. They didn't go into an explanation of why interest rate hikes are themselves a marketplace intervention preventing the proper movement of debt pricing. They didn't even get lost in the labyrinth of exchange rates, and the impact all of this has upon a global trade currency.

Their explanation was about as simple as you can get.

> 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?

Think this through and remember that food and fuel are must haves. There will always be demand, even at high prices. Just less of it. Which is what the point is.

Re: Fed increases target rate to 3.75-4.00%

#150

Post by lamontcg »

miamibre wrote: post #145
apropos_g wrote: post #4

"I am once again asking for" a common sense explanation for how increasing interest rates will reduce the prices of retail food and gas. (This should be the new Deleuze meme.)

I think a lot of people aren't approaching the problem correctly. 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 mone…

Economists have predicted "soft landings" before every recession I can remember where I've followed what the Fed has been saying (I don't quite remember the Volker Fed, I was a little too preoccupied with Star Wars toys and Legos).
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